1QFY20 CNP of RM7m is within our expectation at 28% of FY20 earnings but below consensus’ at only 16% as they might have underestimated the MCO impact. We like KIMLUN for their small earnings base and all-round involvement in either big infra projects or smaller scale affordable homes which would play to their advantage when pump priming initiatives commence. Maintain OP and TP of RM1.00.

Within our but below consensus expectations. 1QFY20 CNP of RM7m came within our expectation at 28%, but below consensus’ at only 16% of full-year estimate. The shortfall against consensus was due to the MCO which led to lower-than-expected margins. No dividends as expected.

Highlights. 1QFY20 CNP was down 58% QoQ as MCO-led disruptions caused (i) slower revenue recognition by 24% from construction (-25%) and manufacturing (-17%), and (ii) a squeeze in pre-tax margins (-3ppt) as fixed overheads remained despite the lowered revenue. Similarly, 1QFY20 CNP was down 56% YoY for the same reasons.

Higher opportunity costs. Back in 2017 and 2018, KIMLUN had embarked on an aggressive land banking strategy by accumulating (i) 3 plot of lands in Johor for a cumulative sum of RM120m and (ii) 77 bungalow plots in Shah Alam for RM68m. Given the persistent weak economic backdrop for properties, it will be hard to monetise these assets and KIMLUN will have to bear the burden of higher financing and opportunity costs in the near future. Case in point, 1QCY20 net gearing increased further to 0.55x with financing costs increasing 15%/7% QoQ/YoY. We note that there is an outstanding RM22m for land purchase yet to be paid which would increase net gearing to 0.58x once settled.

Order-book outlook. Forward earnings will be underpinned by outstanding order-book of RM1.4b in construction jobs (1.75x cover) and RM0.28b (1x cover) in manufacturing orders as of March 2020. We have targeted RM500m replenishment (for construction and manufacturing) in FY20.

No change to earnings post results.

Maintain OUTPERFORM with an unchanged Target Price of RM1.00 based on 7x FY21E PER. We like KIMLUN for its small earnings base and their all-round involvement in either big infra projects or smaller scale affordable homes which would play to their advantage when pump priming initiatives commence. Also, current FY21E PER of 5x is attractive given that it is also a name which offers exposure to the rising construction activities in Singapore.

Key risks for our call are: (i) lower-than-expected margins, and (ii) delay in construction works.

Source: Kenanga Research - 29 Jun 2020