KIMLUN’s 1HFY23 results disappointed. Its 1HFY23 core net profit plunged 81% YoY on cost pressures. On a brighter note, its outstanding order book rose 20% QoQ to RM2.14b in 2Q. We cut our FY23-Y24F earnings forecasts by 8% and 15%, respectively, reduce our TP by 9% to RM0.82 (from RM0.90) and downgrade our call to MARKET PERFORM from OUTPERFORM.

KIMLUN barely broke even in 1HFY23 with a core net profit of only RM0.5m, making up 1% and 2% of our full-year forecast and the full year consensus estimate, respectively. The variance against our forecast came largely from its inability to contain costs at both its construction and manufacturing divisions. No dividend was declared during quarter as expected as it usually only pays final dividend in 4Q.

YoY. Its 1HFY23 revenue rose 4% to RM376.0m mainly led by higher revenue from: (i) construction unit (+11%) as work progress accelerated, and (ii) manufacturing segment (+12%) on the delivery of orders in hand. However, its core profit plunged by 81% due to cost pressures as mentioned.

QoQ. Its 2QFY23 top line grew 17% driven largely by construction billings (+24%) while manufacturing sales were flat. However, it was barely profitable at the net level due to elevated costs.

Outlook. As at Jun 2023, its construction outstanding order book stood at RM1.84b (from RM1.42b three month ago) while that of manufacturing unit eased to RM300m (from RM360m previously). Moving forward, we project a brighter outlook for KIMLUN backed by the roll-out of public infrastructure projects. We understand that KIMLUN is eyeing work packages and pre-cast concrete product orders from: (i) Pan Borneo phase 2, (ii) Johor Bahru – Singapore RTS project, (iii) flood mitigation projects, (iv) Singapore Cross Island Line, (v) semiconductor factories, and (vi) MRT3.

Forecasts. We cut our FY23F and FY24F earnings by 8% and 15%, respectively, to reflect weaker margins for both its construction and manufacturing divisions.

Consequently, we reduce our TP by 9% to RM0.82 (from RM0.90) based on unchanged 9x PER, at a 50% discount to 18x we ascribed to mid-sized and large contractor given KIMLUN’s significant smaller size. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We like KIMLUN as: (i) it is a beneficiary of the roll-out of public infrastructure projects, (ii) it capitalises on the stable public infrastructure sector in Singapore with its precast concrete products manufactured in Johor, and (iii) its strong earnings visibility backed by an outstanding order book of RM2.14b which will keep it busy for the next two to three years. However, it has much work to do in terms of cost management. Downgrade to MARKET PERFORM from OUTPERFORM.

Risks to our call include: (i) a weak flow of construction jobs from both 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 - 30 Aug 2023