• MYR1.05 FV based on 10x FY24F P/E. Kimlun Corp is poised to benefit from upcoming developments in Sarawak, Johor, and Singapore. The 10x target P/E is almost -2SD from the Bursa Malaysia Construction Index’s (KLCON Index) 10-year mean P/E, reflecting its smaller market cap (MYR283m). This target is within our 8-10x range ascribed to small-mid-cap peers. The valuation is also undemanding, as KICB trades at 7.7x FY24F P/E, ie c.40% discount from the KLCON Index’s 10-year mean. This report is a follow-up to our earlier trading idea on this stock.

• Sarawak’s higher development expenditure (DE) of MYR5.8bn under Budget 2024 could expedite project rollouts such as the Pan Borneo Highway (PBH) Sarawak as well as the Sabah-Sarawak Link Road (SSLR) – Phase 2 of both projects have yet to be rolled out. As such, KICB is in a sweet spot to leverage on more Sarawak projects given its track record with the PBH Sarawak Phase 1 and current involvement in SSLR Phase 1.

• Strong foothold in Johor and Singapore. KICB has secured >MYR1bn worth of jobs in Johor Bahru with a sizeable presence in Iskandar Malaysia. The announcement on the easing of Malaysia My Second Home (MM2H) requirements and Johor Bahru-Singapore Rapid Transit System Link (RTS) may catalyse more property developments being constructed in Johor. Meanwhile, 21% of KICB’s FY22 revenue came from Singapore via the supply of precast products to projects such as Singapore’s Mass Rapid Transit (MRT) line via its subsidiary SPC Industries (SPC). Singapore’s target to expand the rail network to about 360km by 2030 from c.260km could provide additional new business opportunities to SPC.

• Additional job prospects may come from hospital projects premised on KICB’s additional specialisation for hospitals that was registered with the Construction Industry Development Board in 2020. We also do not discount opportunities from flood mitigation projects the Government is pushing for in states such as Kelantan, Pahang, Selangor, and even Johor.

• We are projecting a 3-year earnings CAGR of 57% – in line with our sizeable construction job replenishment targets of MYR900m and MYR700m for FY24-25. Likewise, we assume a sales order replenishment target of MYR300m for FY23-25 (FY22 actual sales order replenishment: MYR184m) for KICB’s manufacturing and trading segment – backed by Singapore’s total construction demand reaching between SGD25bn and SGD32bn pa from 2023 to 2026. Further upside may be supported by the rollout of Malaysia’s MRT3 project (base case: 1H24).

• KICB has been paying out dividends every year since listing in 2010, with a payout ratio in the 19-44% range. It even paid out dividends worth MYR3.5m in FY21 despite recording a net loss. We believe such a payout trend can be sustained by its healthy FY23F-25F net operating cash flow generation of MYR42-123m, backed by its job replenishment trends. Key risks: Unexpected volatility in building material costs and a slowdown in job rollouts.

Source: RHB Securities Research - 24 Oct 2023