Labour shortage has held players back from bidding aggressively in a market that has yet to see a pick-up in the flow of new jobs. Nonetheless, KIMLUN is bracing for a stronger 2H as its key job, i.e. the RM780m Sabah-Sarawak Link Road, moves up the S-curve, while the government is likely to expedite the rollout of public projects ahead of the 15th General Election (GE15). Maintain OUTPERFORM and TP of RM1.10 for KIMLUN based on FY23E PER of 9x, at a 50% discount over our sector leader’s ascribed PER of 18x given KIMLUN’s smaller size. There is no adjustment to TP based on ESG for which it is given a 3-star ESG rating as appraised by us.

The key takeaways from our recent engagement with KIMLUN are as follows:

1. The acute labour shortage in the industry has held players back from bidding for new jobs aggressively. They are awaiting a government- to-government resolution. KIMLUN has preference for Indonesian workers (vs. those from Bangladesh, Vietnam) given that they are generally hard workers with higher skill levels.

2. Despite the reopening of the economy, the flow of contracts in the market has not picked up significantly. In the private sector space, KIMLUN noticed that private developers are putting into the market smaller launches and skewed towards landed homes (vs. high-rise products). In the public sector space, tenders have yet to be called for Iskandar Bus Rapid Transit (BRT), Sarawak Autonomous Rapid Transit (ART) and Pan Borneo Highway Sarawak (Phase 2);

3. We expect 2QFY22 earnings to improve sequentially (from losses in 1QFY22 as it marked down expected margins for certain projects coupled with poor overhead absorption on weak progress billings), while more significant improvement could come in 2HFY22 when its key project, namely, the Sabah-Sarawak Link Road (RM780m) moves up the S-curve; and

4. KIMLUN remains confident of meeting its orderbook replenishment target of RM600-800m (including new manufacturing orders of RM100-120m). YTD, KIMLUN has secured c.RM200m worth of new jobs. KIMLUN is in a good position to garner a slice of action in the Johor Bahru – Singapore Rapid Transit System (RTS) project, i.e. the supply of precast concrete segments, given the proximity of its plant in Ulu Choh, Johor. Thus far, Ekovest and Gadang have already won work packages from the project.

Forecasts and assumptions. We maintain our forecasts and FY22 orderbook replenishment of RM800m. As at end-March 2022, its outstanding orderbook stood at RM2.01b (construction: c.RM1.63b; precast: RM0.38b), which is fairly close to the peak of RM2.4b in FY17.

We like KIMLUN for: (i) the improved sentiment on construction stocks as the government is expected to expedite the rollout of public projects ahead of the GE15; (ii) KIMLUN’S geographically diversified earnings base with a strong presence in the precast concrete product segment in Singapore; and (iii) its strong earnings visibility backed by an outstanding orderbook of RM2b which could keep it busy for the next two years.

Risks to our call: (i) sustained weak flows of construction jobs from both the public and private sectors; (ii) project cost overrun and liabilities arising from liquidated ascertained damages (LAD); and (iii) rising cost of building materials.

Source: Kenanga Research - 25 Jul 2022