KIMLUN’s precast concrete product segment is in a bright spot, benefitting from a new wave of investment in semiconductor foundries and data centres by MNCs in Malaysia and a new MRT line project in Singapore. Its labour shortage issue will ease with the arrival of >700 new workers by Apr 2023. We fine-tune up our FY23F net profit by 2%, lift slightly our TP to RM1.12 (from RM1.10) and reiterate our OUTPERFORM call.

We attended KIMLUN’s post-3QFY22 results briefing and the key takeaways are as follows:

1. KIMLUN revealed that the strong performance of its manufacturing division in the newly-announced 3QFY22 results was driven by internal orders for precast concrete products for a fast-track building job of a semiconductor plant (the first for KIMLUN) in Penang for a US-based client. Recall, in 3QFY22, the turnover and gross profit of its manufacturing division jumped 35% and 45% sequentially, respectively. Historically, the manufacturing division contributes 40% of KIMLUN’s total gross profits. A new wave of investment in semiconductor foundries and data centres by MNCs in Malaysia has been a shot in the arm for local construction players, including KIMLUN. The building jobs for these foundries and centres, typically fast-track in nature, fetch good margins. KIMLUN is currently bidding for more such jobs in Penang and Johor.

2. Meanwhile, the demand for its precast products in Singapore remains robust underpinned by the construction of Singapore’s Cross Island MRT Line in which KIMLUN has secured two tunnel lining segment packages and is awaiting the tender results of another four packages. To recap, a bulk of KIMLUN’s external manufacturing revenue is derived from Singapore which it has benefitted from the stronger SGD exchange rate (against MYR) which lifted its manufacturing revenue by c.4% in 3QFY22.

3. YTD, KIMLUN has secured RM353m worth of new jobs. However, it conceded that the chances of meeting its initial FY22F replenishment guidance of RM600m-RM800m (eyeing mainly private jobs) is slim as these awards will likely be deferred into 1QFY23. On the public projects front, KIMLUN is cautiously optimistic that these projects would be rolled out under the new government administration but remain uncertain over the timing. It continues to target works in Sarawak’s Autonomous Rapid Transit (ART), Pan Borneo Sarawak Highway (Phase 2), Iskandar Bus Rapid Transit (BRT) and Rapid Transit Systems (RTS).

4. KIMLUN has brought in 70 foreign workers out of a total of 737 approved for both its construction and manufacturing arms. The remaining workers from Indonesia, Bangladesh and Nepal ate targeted to come in gradually up until Apr 2023. With the gradual arrival of these workers, KIMLUN will be able to expedite the delivery of its outstanding order book of RM1.74b (as at end-Sep 2022). A new employment act to come into effect on 1 Jan 2023 mandates the payment of overtime salaries to workers earning less a month salary of less than RM4,000 (previously RM2,500). This may slightly dent its bottom-line given that c.10% of its workers fall under this threshold.

5. Its sole on-going property project i.e. 100 Trees at Bandar Seri Alam, Johor, which comprise 60 units of Semi-D’s (GDV of RM61m), has seen take up of 33% so far. For FY23, KIMLUN intends to launch Bandar Bukit Bayu phase 2 comprising 16 bungalow units with a GDV of RM40m.

Forecasts and assumptions. Post briefing, we keep our FY22 forecasts unchanged but raise FY23F earnings marginally by 2% to reflect: (i) lowered FY22F replenishment assumption of RM500m (from RM800m) but increased FY23F replenishment of RM1.1b (from RM800m) to account for the deferred contract awards, (ii) higher labour costs from the new employment act, and (iii) stronger manufacturing margins on better margin jobs.

Consequently, TP is raised to RM1.12 (from RM1.10) based on unchanged 9x PER - a discount towards big cap contractors PER range of 13-18x given its much smaller size. There is no adjustment to our TP based on ESG given a 3-star ESG rating as appraised by us (see Page 5).

We continue to like KIMLUN for: (i) being a beneficiary from the continuation of public infra projects rollout post elections, (ii) its 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 order-book of RM1.74b which could keep it busy for the next two years. Maintain OUTPERFORM.

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 - 5 Dec 2022