Kimlun’s 1HFY21 core earnings of RM11.5m were below our and consensus expectations at 38%/36% of forecasts. The quarter was plagued by disruptions from Phase 1 and steep margin decline. Construction order book is dwindling at RM800m with no notable contracts secured in FY21. Company’s RM500m target this year looks a tough ask. Its hospital construction license is comforting as we expect higher budget allocation going forward. Manufacturing remains steady with order book unchanged but offtake is hampered by labour crunch in Singapore. Cut FY21-23 earnings by -3% to -7%. Maintain HOLD with lower TP of RM0.84 after earnings adjustment pegging FY22 EPS to 7.0x multiple.

Below expectations. Kimlun reported 2QFY21 results with revenue of RM214.3m (2% QoQ, 128% YoY) and core PATAMI of RM2.4m (-74% QoQ, vs core loss of - RM9.8m in 2QFY20). This brings 1HFY21 core PATAMI to RM11.5m (vs core LATAMI of -RM3.2m in 1HFY20) falling below our/consensus expectations at 38%/36% of full year forecasts.

Deviations. Results shortfall is attributed to weaker-than-expected profit margins resulting from material costs pressure and low operational productivity.

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

QoQ. Core PATAMI declined by -74% as its construction and manufacturing business were significantly disrupted by imposition of Phase 1 restrictions in June-21. The decline was partially mitigated by increased sales of its Bukit Bayu project resulting in flattish revenue (2%).

YoY/YTD. Kimlun returned to the black YoY and YTD on the back of higher revenue (128% YoY, 25% YTD) as all of its business segments rebounded. The rebound was aided by the low base effect given MCO1.0’s impact on 2QFY20 and 1HFY20.

Construction. Kimlun’s outstanding construction orderbook amounts to a dwindling RM800m lasting the next 2 years. Replenishment has been challenging in 2021 with no contract of note secured thus far. The company’s replenishment target of RM500m for FY21 looks to be beyond reach, in our view. However, we do expect a pick-up in tender opportunities next year. Kimlun’s CIDB certification obtained in late 2020 which enables the group‘s participation in hospital projects is comforting as we anticipate higher allocation from the upcoming Budget-22 and 12MP. Other opportunities for the company are RTS, PBH Sarawak (Phase 1) and affordable housing projects.

Manufacturing. Kimlun’s outstanding manufacturing orderbook stands unchanged at RM300m. Offtake has suffered in tandem with slower construction activities across the causeway due to various supply chain issues. We reckon current labour supply challenges will be slow to subside as mitigation is tricky amidst the ongoing virus spread. In terms of contract opportunities, we do expect Kimlun to continue securing various project orders from Singapore and could also secure work from the upcoming RTS.

Forecast. Cut FY21/22/23 earnings by -7.0%/-3.0%/-5.7% after slashing contract win and margin assumptions.

Maintain HOLD, TP: RM0.84. Maintain HOLD with lower TP of RM0.84 (from RM0.86) 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.

Source: Hong Leong Investment Bank Research - 21 Sept 2021