Kimlun’s FY20 core earnings of RM15m were above ours and consensus expectations. Beat was driven by leaner than expected cost. Kimlun’s outstanding construction orderbook now stands at RM1.1bn lasting two years. Its manufacturing orderbook stands at a decent RM300m. Increase FY21-22 earnings by 2-4% post-imputing higher replenishment assumptions and property launches. Maintain HOLD with higher TP of RM0.91 after earnings adjustment pegging FY21 EPS to 7.0x multiple (near 5 year mean).

Beat expectations. Kimlun reported 4Q20 results with revenue of RM243.6m (15% QoQ, -25% YoY) and core earnings of RM12.0m (90% QoQ, -28% YoY). This brings FY20 performance to core earnings of RM15.2m, decreasing by -74% YoY. Results beat our and consensus expectations coming in at a 127% of our full year forecasts (consensus: 126%). Note that core earnings are adjusted for RM7.2m of impairment.

Deviations. The results beat was mainly due to leaner than expected cost structure.

Dividends. DPS of 1 sen was declared with ex. date to be determined later (FY20: 1 sen; FY19: 3.3 sen).

QoQ. Core earnings rebounded by 90% on the back higher revenue for its manufacturing segment as precast deliveries to Singapore picked up in tandem with construction activities there. Higher contribution of manufacturing also led to higher stronger margin improvement.

YoY/YTD. 4Q20 core earnings declined by -28% and -74% on a YoY and YTD respectively. YTD performance was hampered by various forms of MCO in 2020 with worst being the stop work order period reflected in 2QFY20. Kimlun’s weaker performance on a YoY basis can be attributed to: (1) lower construction productivity from SOP measures and worker shortage and (2) supply of precast components for MRT2 approaching tail end.

Construction. Kimlun’s outstanding construction orderbook amounts to RM1.1bn which will last the next 2 years. Works are still seeing productivity constraints due to worker shortages since June coupled with ongoing SOP demands. Kimlun has recently obtained a CIDB license allowing it to bid for hospital projects. Nonetheless, we anticipate competitive bidding given the dearth of jobs in the market. Additionally, Kimlun also expects to participate in phase 2 of PBH Sarawak (150km) leveraging on its existing presence there executing phase 1. Management is adopting a replenishment target of RM500m having achieved RM464m in 2020. We raise our orderbook replenishment assumptions for 2021 from RM400m to RM500m having been too conservative previously.

Manufacturing. Kimlun’s outstanding manufacturing orderbook stands at RM300m lasting the next two years. Delivery of precast products has recovered buoyed by stronger construction activities in Singapore with Malaysian pace of works expected to rebound further post-MCO2.0. Management anticipates continuing stream of 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. Increase FY21-22 earnings by 4.2% and 2.4% after imputing higher contract replenishment and assumption of new launches.

Maintain HOLD, TP: RM0.91. Maintain HOLD with higher TP of RM0.91 (from RM0.87) after earnings adjustments, pegged to 7.0x target P/E multiple (near 5 year mean). Stock currently trades at a fair FY21-22 P/E multiple of 6.9x considering the lack of any meaningful near term catalysts.

Source: Hong Leong Investment Bank Research - 29 March 2021