There was little surprise from the briefing held last Fri. Replenishment progress for construction and precast remained underwhelming. However we do note that guidance for both is unchanged. Outstanding construction tenders are for hospital, infrastructure in Sarawak and private sector opportunities. Going forward, construction progress on selected projects could slow given elevated input costs. Precast deliveries to SG remains hampered by the labour crunch. Order opportunities would come from upcoming RTS and various railway lines under construction in SG. Tweak FY21/22 earnings by -6.3%/+2.3%. Maintain HOLD with marginally higher TP of RM0.85 based on FY22 EPS pegged to 7x P/E multiple. Key risks include: 1) high material prices 2) slow job rollout and 3) labour shortages.

Kimlun Held An Investor’s Briefing Last Fri With the Following Key Takeaways:

Construction. Outstanding construction orderbook amounts to a dwindling RM800m lasting the next 2 years. Contract replenishment has been challenging in 2021 amounting to a mere RM20min in 1HFY21 and little indications of more achieved since. However, management has maintained its RM500m construction contract replenishment guidance for FY21 despite slightly less than 3 months remaining. Some outstanding tenders are for hospital, infrastructure projects in Sarawak and private sector opportunities. Given the time constraint we have imputed a RM250m assumption in FY21 which could hinge on revival of private sector jobs on reopening. On the execution side, Kimlun has obtained approval from several clients to slow down construction progress in view of elevated material prices. This could slow down recognition vs. expectations increasing downside risks to earnings forecasts.

Sarawak updates. PBH Sarawak has achieved a progress 90%. We note that this progress rate is relatively unchanged from the rate divulged in its last briefing in April- 21, implying difficult construction conditions, which we think is due to supply chain issues in addition to restrictions. Management has also indicated limited timeline visibility for PBH Phase 2 tenders. As such, Kimlun has tendered for other state infrastructure projects.

Manufacturing. Kimlun’s outstanding manufacturing orderbook stands at RM300m. Orders for 1HFY21 came in at RM75m (SG: 94%) vs our assumptions of RM200m orders in FY21. However, like construction, management has maintained its guidance of RM150-200m for FY21. 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. Deliveries have also suffered in tandem with slower construction activities in SG 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.

Property. Kimlun is aiming to launch 16 units of bungalows for Phase 2 Bukit Bayu and 60 units of semi-detached houses in Bandar Seri Alam fetching a total GDV of RM98m. Recognition should span a period of 24 months and we think could start next year.

Forecast. Tweak FY21/22 earnings by -6.3%/+2.3% after adjusting for property recognition assumptions.

Maintain HOLD, TP: RM0.85. Maintain HOLD with slightly higher TP of RM0.85 (from RM0.84), based on FY22 EPS 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 3) political fluidity and 4) labour shortages.

Source: Hong Leong Investment Bank Research - 11 Oct 2021