Kimlun’s 69.5%-owned subsidiary Kii Melodia S/B, is acquiring 11.12 acres of commercial land in Bandar Seri Alam for RM40.5m (RM83.6psf). Despite the bargain price, we are neutral as Kimlun has been aggressively purchasing lands since 2017, incurring higher opportunity costs as existing weak market condition has impelled them to hold onto these lands with uncertain development timeline. No change to earnings and reiterate OP with unchanged TP of RM1.30 based on 10x FY21E PER.

Acquiring two plot of lands. Kimlun’s 69.5%-owned subsidiary Kii Melodia S/B is purchasing 11.12 acres of commercial freehold land in Bandar Seri Alam (Johor) from United Malayan Land Bhd for RM40.5m (or RM83.6psf). These lands are purely commercial with a plot ratio of 4x (effective 3.5x after deducting infra). The transaction is expected to be completed in 3QCY21 and management is looking at development in the next 1.5 to 2 years, if market condition is favourable.

A good deal… Based on surrounding commercial properties (i.e. shop lots) transacted within the vicinity (refer overleaf), we note that the average transaction prices since 2016 is RM197psf. As no GDV guidance was provided for these two plots, by extrapolating the average price of RM197psf onto the land’s plot ratio of 3.5x, we derive a potential GDV of RM334m. This implies a land/GDV ratio of 12% - a steal in our view; even more so when these two plots have dual frontage located within a matured township developed since 1992. Note that our assumption of RM197psf is on the conservative-end as the shop lots just diagonally across these lands are transacting at RM248psf (refer overleaf for map).

…but cautious on its growing land appetite. Despite the bargain, we note that Kimlun has been on an aggressive acquisition path, effectively acquiring RM256.4m worth of properties/lands since 2017 (refer overleaf for details). These acquisitions have raised net gearing up from 0.10x to 0.47x (as of 3QFY20) with higher financing costs to bear. Given the uncertainties over the property landscape brought upon by the Covid-19 crisis, we are neutral over this acquisition as land banks bought earlier since 2017 have yet to be developed and purchasing additional land banks now (albeit at a low price) would incur additional opportunity costs i.e. higher interest costs/lower borrowing capacity. We note that financing these two new plots would increase their net gearing to 0.5x (from 0.47x).

No change to FY21 estimates as developments of this new land will only commence later in FY22/23 and the extra financing costs arising from this acquisition is considered negligible for FY21 (as deal completion expected only in 3QFY21). As of 3QFY20, Kimlun’s outstanding construction and manufacturing order-book stands at RM1.54b (1.5x cover).

Maintain OUTPERFORM with an unchanged TP of RM1.30 based on 10x FY21E PER. We continue like Kimlun for their small earnings base and all-round exposure to big infrastructure jobs as well as small scale affordable housing which would be beneficial when the recovery theme picks up momentum.

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

Source: Kenanga Research - 6 Jan 2021