Kimlun together with Bayu Damai Equity S/B in a 49%:51% vehicle (Bayu Damai S/B) will be acquiring 43.5 acres of land in Cheras for RM95m. We are slightly negative over this development as we find Kimlun’s aggressive land banking strategy slightly risky from the balance sheet front which will increase its net gearing to 0.61x (from 0.55x). Reduce FY21E earnings by 4% post land acquisition and lower TP to RM0.96 (from RM1.00). Maintain OP.

Acquiring lands in Cheras. Through a 49% share subscription in Bayu Damai S/B, Kimlun and its partner (Bayu Damai Equity S/B which owned the other 51%) will be acquiring 43.5 acres of land in Alam Damai (Cheras) for RM95m. In essence, Kimlun is effectively acquiring 49% stake in this land for RM41.9m – translating to RM45/sq ft. The land would be developed in phases over 10-15 years starting from 2022 comprising apartments, condominiums and shop lots with a tentative cumulative GDV of RM2.2b.

While we think the land is in a prime location, we are slightly negative over this move as we find Kimlun’s land banking strategy aggressive at this juncture given (i) the uncertain economic situation stemming from Covid-19 and (ii) the structural oversupply issue facing the property market in Malaysia. Post-completion of the acquisition in 4QFY20, Kimlun’s net gearing is expected to rise to a relatively high level of 0.61x (from current 0.55x) – resulting in limited debt headroom should credit risks from private clients emerge. To put its gearing level in a relative context, Kimlun’s peak net gearing was 0.64x back in 2013 just before a rights issuance was called.

Already high opportunity costs. To recap, back in 2017 and 2018, Kimlun had already embarked on an aggressive land banking 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 weak economic backdrop for properties, KIMLUN will have to bear the burden of the higher financing and opportunity costs in the near future. Case in point - 1QCY20 financing costs increased 15%/7% QoQ/YoY.

Reduce FY21E earnings by 4% after incorporating higher borrowings for the land acquisition.

Maintain OUTPERFORM with a lower Target Price of RM0.96 (from RM1.00) based on 7x FY21E PER. Overall, despite the riskier stance taken by management, we still 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 5.7x is attractive given that it also 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 - 11 Aug 2020