KIMLUN announced that they are acquiring 2 plots of freehold land (total 23ac) from MAHSING for RM36.1m. Neutral on the land purchases as we believe the lands could only be developed from FY2020 onwards while noting that net gearing level post acquisitions remains manageable. No changes to our FY17-18E earnings. Maintain our MP call with unchanged TP of RM2.27 based on 9.0x FY18E PER.

2 new land acquisitions in Johor. Yesterday, KIMLUN announced that they are acquiring 2 plots of land from MAHSING for a total consideration of RM36.1m. The first commercial titled land located at Taman Sri Pulai Perdana spans 5.2ac is surrounded by a matured township and will be acquired at RM14.2m (RM63.5psf). Meanwhile, the second plot of agriculture titled land located at Meridin East spans 17.9ac will be acquired at RM21.8m (RM28.0psf). We note that the transactions are only expected to conclude in 4QCY20 (36 months) unless KIMLUN decides to conclude earlier. The lands are for mixed development purposes.

Neutral on acquisitions. Given the lengthy timeline of acquisition, we are neutral on the land purchases, as we believe they would only be developed from FY20 onwards and contributions would only be felt then. As no GDV guidance is available, based on a tentative land/GDV ratio of 10-15%, we expect the two pieces of land to generate a potential GDV range of RM240m-RM360m. Net-gearing wise, it will increase to 0.12x level (from 0.06x as of 3Q17), which is still manageable.

Outlook. Moving forward, we opine that KIMLUN will continue to purchase pocket of land banks in Johor if the opportunity arises given their manageable gearing level. Currently, outstanding construction order-book 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 targeted RM300m 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 order-book 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 estimate as we only expect developments to take place from FY20 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) margin of c.9%.

Source: Kenanga Research - 29 Dec 2017