Kimlun’s 1QFY21 core earnings of RM9m (-24% QoQ, 38% YoY) were broadly within our and consensus expectations. The quarter saw operational difficulties stemming from MCO2.0. Kimlun’s outstanding construction orderbook now stands at RM920m lasting two years. Its manufacturing orderbook stands at a decent RM290m. We note further downside risk to earnings should works be barred in the upcoming lockdown. Cut FY21-22 earnings by 12-14%. Maintain HOLD with lower TP of RM0.78 after earnings adjustment pegging FY21 EPS to 7.0x multiple (near 5 year mean).

Within expectations. Kimlun reported 1QFY21 results with revenue of RM210.3m (- 14% QoQ, -14% YoY) and core earnings of RM9.1m (-24% QoQ, 38% YoY). Results were within our and consensus expectations coming in at a 21% of full year forecasts.

Dividends. No dividends were declared. Dividends are typically declared in 4Q.

QoQ. Core earnings declined by -24% dragged by weaker revenue performance (- 14%) attributed to contraction at construction (-18%) and manufacturing (-7%) segments. Kimlun’s operational productivity was affected by MCO2.0 during the quarter. Additionally, both construction projects and precast projects were nearing completion.

YoY. 1Q21 core earnings increased by 38% offsetting a lower topline (-14%) in part due to higher margins from its manufacturing segment resulting from sales of higher margin products. Contributing to the bottomline increase was lower selling and administrative expense (-18%).

Construction. Kimlun’s outstanding construction orderbook amounts to a dwindling RM0.92bn which will last the next 2 years. Kimlun has not secured anything sizable thus far as the market in Johor has been soft with ongoing border restrictions with Singapore. Kimlun’s replenishment target is RM500m this year which we believe given the current circumstances, may come towards year end at best. We believe financial performance will get much tougher with the imposition of total lockdown. Nonetheless, we do not yet know the scope of permitted works as at time of writing but safe to say Kimlun’s replenishment target looks increasingly challenging.

Manufacturing. Kimlun’s outstanding manufacturing orderbook stands at RM290m lasting the next two years. Delivery of precast products has recovered buoyed by construction activities in Singapore. However, we believe current manpower crunch across the causeway will likely slow offtake for Kimlun precast products. Should Singapore manage to curb infections and normalise quicker, we believe this segment offers Kimlun reprieve from domestic operations where infections are much larger in absolute and relative terms. The segment should receive continuing orders from Singapore and could secure work from the upcoming RTS.

Forecast. Despite the inline earnings, we cut FY21-22 earnings by -14.3% and - 12.0% after adjusting billings and margin assumptions. We note further downside risks to FY21 earnings (MKN has not release lockdown SOP as at time of writing).

Maintain HOLD, TP: RM0.78. Maintain HOLD with lower TP of RM0.78 (from RM0.91) after earnings adjustments, pegged to 7.0x target P/E multiple (near 5 year mean). Upside risks: speedy project rollout in My and SG; Downside risks: 1) high material prices 2) slow job rollout and 3) political fluidity 4) further lockdowns.

Source: Hong Leong Investment Bank Research - 31 May 2021