News  Yesterday, Kimlun announced that its wholly owned subsidiary, Kimlun Land Sdn Bhd (KLLSB) has entered into a Sale and Purchase Agreement with Bayu Melati Sdn Bhd (BMSB) for the purchase of forty-one (41) 99-year leasehold vacant detached lots on en bloc basis, measuring approximately 8.87 acres, for a total cash consideration of RM29.0m.

 The 99-year leasehold vacant detached lots with the leasehold expiring 27 January 2103 are located in the Seksyen U10 of Shah Alam, Petaling Jaya, Selangor.

 The proposed acquisition is expected to be completed in the 3Q14. (Please refer to Appendix for details)

Comments  We are not entirely surprised by the acquisition announcement, as we believe the management has been actively looking to increase the size of its land bank to enhance its future revenue and earnings, especially after some cash were raised after the rights issue exercise and the disposal of commercial land in Nilai late last year.

 We deem the land cost (RM75 psf) is cheap compared to the industry average range of RM100-RM120 psf.

 While the development plan has yet to be finalized, the company has indicated that they planned to build landed properties/bungalows on the subject property. This would help the company to assume lower property sector risk and recognise the revenue earlier, starting from FY15.

 The land acquisition funding structure has yet to be finalized. Assuming 70:30 debt-equity ratio, we estimate the company’s net gearing to increase to 0.46x from 0.38x. (refer overleaf for more details). This is reaching our maximum comfort net gearing levels of 0.5x-0.6x. At such levels, we do not think Kimlun will aggressively go for landbanking in the near-term as it also needs fund for its increasing working capital.

Outlook  Kimlun’s current outstanding orderbook of c.RM2.1b remains healthy and will keep them busy for the next two years.

 We are expecting more meaningful contribution from its maiden property development project in Cyberjaya (The Hyve) in FY14.

Forecast  No changes to our FY14E earnings estimate, as the project plans and launch details have yet to be announced.

Rating Maintain UNDERPERFORM

 Post rights issue, there is a major EPS dilution, affecting valuations adversely. Expect significant contribution from the property segment from FY15 onwards.

 Net gearing ratio of 0.46x is reaching our maximum comfort zone.

Valuation  Our price target is maintained at RM1.55. This is based on an unchanged 9x FY14 PER.

Risks to Our Call    Faster-than-expected construction works,

 Higher-than-expected construction and property margins

Source: Kenanga