Kimlun’s 1QFY22 core LATAMI of -RM6.1m was below our and consensus expectations. The quarter was plagued by recognition lag of new projects due to mobilisation (old projects tapered off) and margin markdown. Earnings are expected to gradually improve and normalise in 2HFY22. Replenishment opportunities could come from Kuching ART, hospitals, private sector buildings and precast orders from RTS and MRT3. Cut FY22 earnings by -36.2% but increase FY23 earnings by 6.6%. Maintain BUY with lower TP of RM0.86 based on 8.0x mid-FY22 EPS.

Below expectations. Kimlun reported 1QFY22 results with revenue of RM174.0m (9.2% QoQ, -17.3% YoY) and core LATAMI of -RM6.1m (against core LATAMI of -RM1.7m in 4QFY21, and core PATAMI of RM9.1m in 1QFY21). Results were below our and consensus expectations (HLIB: RM43.8m; consensus: RM39.4m).

Deviation. Results missed on lower than expected construction burn rate and margins.

Dividends. No DPS Declared.

QoQ. Kimlun’s core loss widened from -RM1.7m to -RM6.1m in 1QFY22 resulting from weak construction contribution which saw revenue falling -17.7% while at the GP level, segment turned losses of -RM1.7m. We gather that this is due to timing lag between the completion of old projects and contribution of new projects (mobilisation phase). Kimlun also did a markdown in margins for its projects after accounting from the recent spikes in various costs (mainly materials and fuel). Its precast segment was also weaker (revenue: -12.5%) due to slow recognition of new orders.

YoY. Performance turned core loss of -RM6.1m (from RM9.1m core PATMI) dragged by its construction and manufacturing divisions as revenue fell -26.8% and -48.0% respectively. Both divisions suffered from timing lag in order recognition.

Construction. Outstanding construction orderbook amounts to RM1.63bn, translating to a healthy 3.2x cover. Contribution from its new projects has started moving in 2QFY22 but performance is expected to only normalise in 2HFY22 once recognition picks up. Segment margins are also expected to normalise as Kimlun has adjusted assumptions for the recent spikes in various costs. Nonetheless, margins are still at the mercy of future movements in the prices of these materials. On the replenishment front, opportunities could include Sarawak Metro, hospitals, private sector building works, CSR and Johor-SG RTS.

Manufacturing. Kimlun’s outstanding manufacturing orderbook stands at RM380m. Management is expecting stronger contribution from this segment starting in 2QFY22. Guidance on replenishment this year is RM100-140m likely to consist of new building related orders and possibly infra related orders from SG. As for the MRT3, Kimlun stands as a key beneficiary given its track record in supplying precast products to MRT1 and 2. Recall that MRT2 yielded c.RM270m of TLS/SBG orders for Kimlun. Since MRT3’s project value is not materially different, Kimlun’s potential precast contract wins could be similar.

Forecast. Cut FY22 earnings by -36.2% but increase FY23 earnings by 6.6%. Introduce FY24 earnings forecasts of RM50.0m.

Maintain BUY, TP: RM0.86. Maintain BUY with lower TP of RM0.86 after the earnings cut. TP is derived from pegging mid-FY22 EPS to 8.0x target P/E multiple (unchanged), similar to FY16 trading range. The stock currently trades at an attractive FY23 P/E of 5.4x and P/B of 0.36x (-1.5SD 10 year range).

Source: Hong Leong Investment Bank Research - 31 May 2022