News  Yesterday, Kimlun proposes to undertake a renounceable rights issue of 60,112,500 Rights Shares on the basis of one (1) Rights Share for every four (4) existing Kimlun Shares held together with 60,112,500 Warrants on the basis of one (1) Warrant for every one (1) Rights Share subscribed while the issue price has yet to be fixed at this juncture.

Comments   We are not entirely surprised with the announcement as management had once indicated in their semi-annual results briefing that they were considering a corporate exercise to raise fund for their working capital needs.

Based on the indicative issue price of RM1.10 per rights share, Kimlun would be able to raise about RM66.1m whereby 98% of the proceeds from the rights issue would be utilised for working capital needs to finance Kimlun’s day to day operations while the remainder would be for the expenses in relation to the proposed rights issue with warrants. Post the proposed exercise and assuming full exercise of the warrants, Kimlun’s gearing will improve from 0.62x to 0.38x providing Kimlun more room for gearing in the future.

Post rights and full exercise of the warrants, Kimlun’s would see a major dilution impact of 33% on its FY14E EPS from 21.5sen/share to 14.3sen/share. However, our Target Price would be adjusted down by 21% from RM1.93 to RM1.52 after adjusting for rights issuance and also the exercise of the (1/10) warrants over the next 10 years.

Outlook  Kimlun’s total outstanding orderbook stands at c.RM2.0b mark (construction: RM1.67b, manufacturing: RM400m), enough to last Kimlun for the next two years and its property project in Cyberjaya would see some positive contribution in 2H14 and the recent fund raising activities would allow Kimlun to have more room for gearing should the need arises for its property development in Medini.

Forecast  No changes to our earnings forecasts.

Rating   Downgrade to UNDERPERFORM

We downgrading our recommendation on Kimlun to UNDERPERFORM (previously, MARKET PERFORM) as we do not see any near term catalyst coupled that the potential earnings contribution from its property development in Johor may only materialise in FY15.

Valuation  We are keeping our TP of RM1.93 based on an unchanged 9x FY14 PER.

Risks  Delays in executions and higher-than-expected building material prices. 

Source: Kenanga