Kimlun’s 9MFY20 core earnings of RM3.2m were below ours and consensus expectations. Poor performance was due to revenue slippage resulting from lower productivity levels. Kimlun’s outstanding construction orderbook now stands at RM1.2bn, translating to a decent cover ratio of 1.2x. Its manufacturing orderbook stands at RM240m, representing c.0.9x cover. Slash FY20-22 earnings by 5-58%. Downgrade to HOLD with lower TP of RM0.75 after pegging FY21 EPS to 6.0x multiple. De-rating is warranted given the earnings miss.

Big miss. Kimlun reported 3QFY20 results with revenue of RM211.8m (+125% QoQ, -37% YoY) and core earnings of RM6.3m (against core loss of -RM9.8m 2QFY20, - 49% YoY). This brings 9MFY20 performance to core earnings of RM3.2m, decreasing by -92% YoY. Results missed our and consensus expectations significantly coming in at a mere 11% of our full year forecasts (consensus: 12%).

Deviations. The results shortfall was mainly due to weak bounce back in construction and manufacturing segments.

Dividends. No dividends were declared for the quarter (9MFY20: nil; 9MFY19: nil).

QoQ. 3QFY20 performance bounced back to the black from core loss of -RM9.8m in 2QFY20 as business operations resumed albeit at lower productivity levels. 2QFY20 numbers were deflated from the MCO imposition while Kimlun continues to incur fixed costs such as rental, salary and depreciation expenses.

YoY/YTD. YoY and YTD core earnings declined by -49% (YoY) and -92% (YTD) respectively. Dragging the numbers on the YTD basis was the MCO period reflected in 2QFY20, where a majority of the quarter saw works suspended. Kimlun’s poorer performance on a YoY basis can be attributed to: (1) lower construction productivity from SOP measures and worker shortage; (2) supply of precast components for MRT2 approaching tail end and (3) weak resumption of construction activities in Malaysia and Singapore affecting precast deliveries. To put things in perspective, Kimlun’s 3QFY20 earnings were 4% lower than earnings notched up in 1QFY20 despite a 2 week stop work order for the latter.

Construction. Kimlun’s outstanding construction orderbook amounts to RM1.2bn which translates to 1.2x cover. Construction activities have resumed in June with lower productivity levels due to SOP compliance. Compounding this is the shortage of workers available impeding its ability to normalise. We anticipate limited replenishment potential in the near term with borders remaining shut, property market down south should be negatively impacted.

Manufacturing. Kimlun’s outstanding manufacturing orderbook stands at RM240m, representing c.0.9x cover. We gather delivery of precast products has been slow as construction activities in Malaysia and Singapore were slow to get off the ground. Management anticipates more orders from Singapore’s sewerage projects. Going forward, we reckon Kimlun should be able to secure materials supply contracts from the Rapid Transit System (RTS).

Forecast. Slash FY20-22 by -58.3%/-6.0%/-5.4% after revising margin and billings assumptions.

Downgrade to HOLD, TP: RM0.75. Downgrade to HOLD with lower TP of RM0.75 (from RM0.87) after earnings adjustments. Our TP is derived based on FY21 earnings to reflect a more normalised earnings for the company as well as pegging to a lower 6.0x target P/E multiple (10% discount to 5 year mean) which we feel is warranted given the earnings miss.

Source: Hong Leong Investment Bank Research - 30 Nov 2020