News

Yesterday, Kimlun announced that it has entered into a Sale and Purchase Agreement with Choo Chek Juan @ Choo Ou Kiak for the purchase of 29 contiguous freehold agricultural land on en bloc basis, measuring approximately 140.8 acres, for RM28.3m (RM5.0 psf).

The land is located along Jalan Kota Tinggi- Pengerang, in District of Kota Tinggi, Johor.

The proposed acquisition is expected to be completed in the 1Q16.

Comments

We were not entirely surprised as the management did mention that it has been looking to replenish its land bank to expand its property development segment (8.3% of FY14 revenue) over the mediumlong- term. We understand that the price tag of RM5.0 psf is within the market price range of Kota Tinggi land at RM4.5-RM12.0 psf.

While the development plan for this land has yet to be finalized, given the size of the land, it is likely to be a township development.

Balance-sheet-wise, assuming this acquisition is financed via 70.0% and 30.0% debt and equity, respectively, we estimate the company’s net gearing to increase to 0.26x from 0.19x. This is lower than that of other developers’ net gearing range of 0.4-0.5x. Even after adding up the conversion cost (estimate 30.0% higher than its land cost of RM5.0 psf), the group’s net gearing would still hold steady below 0.3x.

Outlook

Stay bright as: (i) more affordable housing jobs have yet to be built in southern region, (ii) we expect KIMLUN’s margins to slowly improve driven by manufacturing division from Singapore MRT project as well as no more startup costs of new plant, and (iii) we expect it to benefit from 11MP on MRT2 announcement.

Forecast

Unchanged pending more details on GDV, launches and development plan of the land.

Rating

Maintain OUTPERFORM

Valuation

We remain positive on KIMLUN’s outlook as we believe it is one of the contractors that will benefit from 11MP. As such, we maintain our OUTPERFORM call and unchanged TP of RM1.53 based on ascribed FY15E PER of 10x.

Risks to Our Call

Below-than-expected margins

Delay in construction works

Lower-than-expected orderbook replenishment

Source: Kenanga Research - 14 May 2015