Despite 9MFY20 coming in below on weaker-than-expected rebound in construction activities in 3QFY20, we maintain our OP call and TP of RM0.96 pegged to 7x FY21E earnings as we believe the normalisation of construction activities is imminent by FY21. We continue to like Kimlun for their small earnings base and all-round exposure to either big infra projects or smaller scale affordable housing which would play to their advantage when pump-priming initiatives commence.

Below expectations. 3QFY20 CNP of RM6.2m (+162% QoQ; -50% YoY) brought 9MFY20 CNP to RM3.2m, below our/consensus expectation as it only accounted for 13% each of both full-year estimates. The shortfall was due to the slower-than-expected pick-up in 3QFY20 construction activities post lockdown faced in 2QFY20. No dividends as expected.

Highlights. 3QFY20 CNP rebounded 162% QoQ led by a surge in revenue (+125%) as the quarter emerged from an MCO-laden 2QFY20. On the back of the higher billings, construction GP profit returned to the black to RM15.5m from a loss of RM1.9m in 2QFY20. Unsurprisingly, 9MFY20 CNP of RM3.2m was down by 92% YoY due to the MCO lockdowns.

Order-book outlook. Forward earnings will be underpinned by outstanding order-book of RM1.2b in construction jobs (1.5x cover) and RM0.34b (1x cover) in manufacturing orders as of Sep 2020. As of 9MFY20, Kimlun has replenished RM420m worth of construction jobs (against our target of RM500m) and RM230m worth of manufacturing orders (against our target of RM250m).

Reduce FY20 earnings by 68% to RM8.1m after imputing in lower construction revenue billings on slower works for the remainder of FY20 especially since CMCO was reintroduced from 14th Oct till year-end. Nonetheless, we keep our conservative FY21 estimates unchanged as we believe activities will imminently pick up, albeit not to pre-pandemic levels.

Maintain OUTPERFORM with an unchanged Target Price of  RM0.96 based on 7x FY21E PER. We like KIMLUN for its small earnings base and their all-round exposures to either big infra projects or smaller scale affordable housing which would play to their advantage when pump-priming initiatives commence. Also, current FY21E PER of 5.8x 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 - 30 Nov 2020