KIMLUN’s 9MFY23 results disappointed. It dipped into a small net loss of RM0.1m in 3QFY23 on cost pressure. On a brighter note, the outlook for the construction sector is positive underpinned by the roll-out of public infrastructure projects. We cut our FY23-24F earnings forecasts by 79% and 28%, respectively, reduce our TP by 9% to RM0.83 (from RM0.91) and downgrade our call to MARKET PERFORM from OUTPERFORM.

KIMLUN barely broke even in 9MFY23 with a net profit of only RM0.4m, making up only 1% and 2% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from high costs at both its construction and manufacturing divisions while their top lines remained weak. No dividend was declared during quarter as expected as it usually only pays final dividend in 4Q.

YoY. Its 9MFY23 revenue dipped 1% in the absence of a pick-up in construction billing and the delivery of pre-cast concrete products, and no major new property launches. Meanwhile, its 9MFY23 net profit plunged by 98% due to cost pressures and earnings gap arising from older construction projects being at the tail-end while the new ones are still in early stages of implementation.

QoQ. Despite revenue growing 5% as work progress on projects secured back in FY22 gained momentum, it dipped into a net loss of RM0.1m in 3QFY23 (vs. a net profit of RM0.1m in the preceding quarter) due to elevated costs.

Outlook. As at Sep 2023, its construction outstanding order book stood at RM1.86b (from RM1.84b three month ago) while that of manufacturing unit eased to RM290m (from RM300m previously). Moving forward, we project a brighter outlook for KIMLUN in FY24 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 FY23-24F net profit forecasts by 79% and 28%, respectively.

Correspondingly, we reduce our TP by 9% to RM0.83 (from RM0.91) based on an unchanged 10x FY24F PER, at a discount to 18x we ascribed to mid-sized to large contractors given KIMLUN’s much 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 RM1.86b which will keep it busy for the next 2-3 years. However, we are concerned over its inability to contain rising costs. Downgrade to MARKET PERFORM from OUTPERFORM.

Risks to our call include: (i) delays in the roll-out of public infrastructure projects, (ii) liquidated ascertained damages (LAD) arising from cost overrun and delays, (iii) rising cost of building materials, and (iv) labour shortages.

Source: Kenanga Research - 30 Nov 2023