KIMLUN announced that they would be acquiring 29.0 acres of freehold agriculture land at Iskandar Puteri for RM82.0m (RM65/sf). NEUTRAL on the acquisition as we wait for more concrete details on future development plans while worth noting that net gearing level post acquisition remains manageable. No changes to our FY17-18E earnings estimates as we expect developments to take place from FY19E. Maintain our MP call with unchanged TP of RM2.27.

Acquisition of 29ac of land from UEMS. Yesterday, KIMLUN announced that they would be acquiring 11.7ha (29.0 acres) of freehold agriculture land at Iskandar Puteri, Johor Bahru for RM65/sf representing a slight discount over independent market valuation of RM83.0m (or RM66/sf). The land is located in a relatively developed area and is along Jalan Kampung Lalang near Horizon Hills, Eco Botanic, Taman Nusa Sentral and Medini Iskandar (refer overleaf for location). The transaction is expected to complete by 4Q18 and a further 6-12 months will be needed to convert the said land from agriculture to commercial for mixed development purposes. Hence, we only expect developments on the newly acquired land to take place earliest from FY19E onwards.

Neutral on acquisition. While management is still uncertain over potential GDV figures, based on a land/GDV ratio of 10-15% of which we have factored in a 20% conversion premium on the acquisition cost of RM82.0m, we would expect the land to generate a potential GDV range of RM650m-RM1.0b. Given that the land spans over 29ac, we believe KIMLUN would split the development into a couple of phases for a few years. For now, we remain neutral on the acquisition as (i) net gearing of 0.19x (from 0.06x) post acquisition is deemed manageable and (ii) pending more concrete details from management in regards to further development plans.

Outlook. Currently, outstanding construction orderbook stands at c.RM2.1b providing visibility for the next two years. Note that YTD construction wins stand at RM940m making up 94% of our FY17E replenishment target. Moving forward, we expect construction revenue to pick up pace as major projects, i.e. Pan Borneo move into more advance billing stages. As for their manufacturing arm, KIMLUN has secured c.RM90m of manufacturing orders making up 30% of our RM300m targeted replenishment. Replenishment target is backed by potential Singapore manufacturing packages, i.e. DTSS 2, MRT Circle line 6 and North South Corridor Expressway. Current outstanding manufacturing orderbook stands at RM0.35b providing visibility for c.2 years. We anticipate contributions from KVMRT2 TLS and SBG to continue picking up pace in 4Q17.

Maintaining FY17-18E earnings. Post-acquisition, we make no changes to our FY17-18E earnings estimates as we only expect developments to take place from FY19E onwards.

Maintain our MARKET PERFORM call with an unchanged TP of RM2.27 based on applied 9.0x FY18E PER. While KIMLUN’s applied valuation is at the lower end of our targeted small-mid cap peers’ range of 8.0x-13.0x, we believe it is justifiable as their average FY17-18E PAT margin of c.7% is weaker compared to average peers’ (KERJAYA, HSL, MITRA) margins of c.9%.

Source: Kenanga Research - 21 Dec 2017