Kimlun’s FY22 core PATAMI of RM36.4m beat our and consensus expectations driven by higher-than-expected margins. The quarter saw sustained contribution from its precast segment while construction showed signs of stabilised margins. Billings should continue picking up with the ramp up of new projects. Opportunities in FY23 could include PBH extension, Kuching ART, hospitals, private sector building works and RTS. Kimlun could also benefit from a more transparent procurement process. Strong construction demand in SG should help sustain its precast performance in FY23. Cut FY23/24 earnings forecasts by -9.4% and -5.8%. Maintain BUY with higher TP of RM0.86.

Above expectations. Kimlun reported 4QFY22 results with revenue of RM164.0m (- 29.2% QoQ, 3.0% YoY) and core PATAMI of RM17.4m (7.2% QoQ, vs core LATAMI of -RM1.7m in 4QFY21). This brings FY22 core PATAMI to RM36.4m, increasing by 19.7x. The results beat both our and consensus expectations at 140% and 145% of forecasts respectively. Deviation came from stronger than expected margins.

Dividends. DPS of 1 sen (ex. date to be determined) was declared (FY22: 1 sen; FY21: 1 sen).

EIs. In 4QFY22, we have made adjustments in deriving our core PATAMI for impairment of receivables and contract assets amounting to RM43.5m. This is in relation to a hospital project completed in 2020. The debtor is a jointly owned entity by a state government and a public listed entity and is a concession holder of the hospital spanning 33 years. Management highlights that a chunk of this impairment could be recovered going forward.

QoQ. Core PATAMI increased by 7.2% driven by tax credit during the quarter due to over provision of taxes in the previous quarters. This more than offset weaker top-line numbers mainly due to slower construction billings and precast deliveries.

YoY. Kimlun returned to the black from a core loss of -RM1.7m in 4QFY21 aided partly by higher top-line but more so by higher margins. GP margins expanded by 6.0 ppts driven by stronger precast margins. At the EBIT margin level, the precast division saw margins expanding by 20.6ppts, where we attribute to stronger forex effect and higher deliveries.

YTD. Similarly on a YTD basis, Kimlun’s core PATAMI surged by 19.7x driven by stronger contribution from precast segment due to reasons highlighted above.

Construction. Outstanding construction orderbook amounts to RM1.37bn, translating to a decent 2.5x cover. Contribution from its new projects has increased and should continue picking up this year led by its SSLR contract. Management is optimistic of a better year in FY23 with costs seen stabilising while labour shortage is gradually subsiding. On the replenishment front, opportunities could include PBH extension, Kuching ART, hospitals, private sector building works and RTS. Kimlun could also benefit from a more transparent procurement process going forward.

Manufacturing. Outstanding manufacturing orderbook stands at RM350m. The segment has benefited from positive currency effect and sustained demand from SG. Precast demand could remain healthy in SG taking cue from the Building and Construction Authority’s recent projections for construction output in 2023 of SGD30- 33bn (highest since 2016) which reaffirms the positive outlook for precast product demand in FY23.

Forecast. Despite the strong core numbers we cut FY23/24 earnings forecasts by - 9.4% and -5.8%, adjusting for timing of contract wins.

Maintain BUY, TP: RM0.86. Maintain BUY with slightly higher TP of RM0.86 post rolling over our valuation base to FY23. TP is derived from pegging FY23 EPS to 8.0x target P/E multiple (unchanged), a reasonable range for small cap contractors. The stock currently trades at a decently attractive FY23 P/E of 6.3x and P/B of 0.35x (- 1.5SD 10 year range).

Source: Hong Leong Investment Bank Research - 1 Mar 2023