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MYR1.08 FV based on 8x FY23F earnings. Kimlun is set to leverage on Sarawak’s infrastructure expansion and in Singapore given its strong track record. The 8x target P/E is c.20% higher from its 5-year average, but lower by more than -2SD from the KL Construction Index (KLCON), reflecting its smaller market capitalisation (MYR282m). However, it is within our 8-10x range ascribed to small-mid cap peers. Valuation is also undemanding, trading at 5.9x FY23F P/E, or -1SD from its 5-year mean and at a c.50% discount from the KLCON.
Possible beneficiary of Sarawak’s infrastructure expansion. The unprecedented stronger presence of the Borneo block in the new Unity Government administration will likely have positive implications in terms of higher development expenditure allocations for Sarawak. As such, we think Kimlun is in a sweet spot to leverage on Sarawak projects given its track record in the Pan Borneo Highway (PBH) Sarawak and its current involvement in Phase 1 of the Sarawak-Sabah Link Road (SSLR).
Strong foothold in Singapore. In FY21, 16% of Kimlun’s revenue came from Singapore via the supply of precast products to projects such as Singapore’s Mass Rapid Transit (MRT) line through its subsidiary, SPC Industries (SPC). Moreover, SPC won all the tunnel lining segment (TLS) supply orders in relation to of the extension of Circle Line and North East Line of the MRT project. The expansion of rail networks in Singapore under the Singapore 2013 Land Transport Master Plan could provide additional new business opportunities to SPC till 2030.
Earnings projection. We are projecting a 3-year earnings CAGR of >200% (partly due to low base effect in FY21). This is in line with our higher construction job replenishment targets of MYR500m for FY23F-24F compared to FY22F which is expected to only win c.MYR230m worth of new jobs combined with projects moving higher along the S-curve. Likewise, we assumed a sales order replenishment target of MYR300m for FY23F-24F (FY21 actual sales order replenishment segment: MYR160m) for its manufacturing and trading segment – backed by Singapore’s total construction demand reaching between SGD25-32bn pa from 2023-2026. Further upside may be supported by the rollout of the MRT3 project – Kimlun was involved in MRT1 and MRT2 (cumulative order value of >MYR500m).
Commendable dividend yield. Although Kimlun does not have a dividend policy, the group has been steadily paying out dividends every year since its listing in 2010 with payout ratios ranging from 19-44%. In fact, it paid out total dividends worth MYR3.5m in FY21 despite recording a net loss. Based on our projections, the dividend yields for FY23F-24F are expected to be 4.2% and 4.8%, which we deem to be higher compared to most contractors under coverage which have yields reaching a maximum of 4%.
Key risks: Delays in the arrival of foreign workers, prolonged period higher- than-estimated cost of raw materials, and a slowdown in job rollouts.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....