1QFY22 CNL of RM6.1m is below market expectations. The negative deviation stemmed from weaker-than-expected revenue contributions from its construction division which were insufficient to cover fixed overhead costs. Consequently, we adjust FY22E/FY23E earnings down by 29%/6%. Nonetheless, we foresee prospects of the group to improve in 2H with new job replenishments coupled with earnings turnaround. Hence, despite the underperformance, we maintain OP and raise our TP to RM1.10 (from RM1.00) after rolling valuation base year to FY23 on unchanged 9x PER.

Below expectations. While we had anticipated 1QFY22 earnings to be weak, we did not anticipate a loss. Hence, 1QFY22 CNL (core net loss) of RM6.1m is below our/consensus CNP projection of RM38m/RM39m. The negative deviation stemmed from weaker-than-expected revenue contributions from its construction division which were insufficient to cover the fixed overhead costs – resulting in losses within that segment. No dividends declared as expected as dividends are only declared in 4Q.

QoQ, 1QFY22 core net loss widened by 50% to RM6.1m due to weaker GP margin (-1ppt) dragged down by the construction segment which sank into losses at the GP level due to reduced construction revenue (- 18%) which was insufficient to cover fixed overheads.

YoY, 1QFY22 CNL dipped into the red (versus a CNP of RM9.1m in 1QFY21) due to weaker revenue (-17%) mainly from its construction and manufacturing divisions resulting in lower segmental GP margins. The weaker revenue arose because most of its ongoing jobs are still at the initial stages of construction. The group is put under such circumstance mainly due to the lack of job continuity attributable to a lull in contract replenishment throughout FY21 where the bulk of its replenishment was only secured towards the year-end.

Quarterly earnings will only see improvement in 2HFY22 when key project (i.e. Sabah Sarawak Link Road a.k.a. SSLR – RM780m contract) enters into more advanced stages of works. Currently, the SSLR contract is still at its initial stage which has little revenue recognition. YTD, Kimlun has secured RM160m worth of jobs (construction - RM100m; manufacturing - RM60m) – within our RM800m target (management guides for RM600m-RM800m).

Replenishment prospects include: (i) RTS, (ii) Pan Borneo Sarawak Phase 2, (iii) Autonomous Rail Transit Kuching, (iv) Iskandar BRT, and (v) Central Spine Road. Note that there could be room for upside surprises if Kimlun manages to secure more than two of the said prospects. As of March 2022, outstanding order-book stood at RM2.01b (construction - c.RM1.63b; precast - RM0.38b) – close to its peak level of RM2.4b in FY17.

Reduce FY22E/FY23E earnings by 29%/6% after: (i) lowering revenue assumption for FY22E after deferring progress recognition for ongoing projects and (ii) lowering margin assumptions for its construction division to account for the labor shortages and higher raw material costs experienced within the industry.

Despite the underperformance, we maintain OP and raise TP to RM1.10 (from RM1.00) after rolling valuation base year to FY23E with unchanged PER of 9x. While headwinds still persist at this juncture, we believe the prospect of the group in 2H is more promising with new job replenishments and earnings turnaround. Hence, we deem its current share price levels which implies FY23E PER of 6.1x attractive.

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

Source: Kenanga Research - 31 May 2022