• MYR1.05 FV based on 10x FY24F P/E. Kia Lim is at the forefront of capitalising on Johor's booming property market, driven by major infrastructure projects such as the Johor Bahru-Singapore Rapid Transit System (RTS) and key economic zones. It is benefiting from Johor's strong demand for bricks, while also transitioning to higher-margin operations amidst industry consolidation, record selling prices, and taking advantage of a strong SGD. Its commitment to sustainability via energy-efficient bricks makes it a compelling investment, on top of its attractive 5.7x FY24F P/E.

• Johor’s largest brick manufacturer. Kia Lim has solidified its position as one of the largest clay brick manufacturers in the southern region of West Malaysia. The top three brick manufacturers have a 60% market share in Johor – these include Kia Lim, the biggest player in the state. It has the highest production capacity in the region, at about 180m bricks pa ie equivalent to 400,000 tonnes of clay. This substantial capacity underscores Kia Lim's pivotal role in the building materials sector, as well as its capability in meeting growing demand (especially in Johor) while maintaining product quality.

• About 25% of sales are for the Singapore market. The company is a pioneer in sustainable construction solutions in Singapore, and benefits from a stronger SGD/MYR rate. This success is bolstered by demand for its Clay EconBlock product, which is superior to traditional bricks due to its light weight, thermal efficiency, and better acoustic insulation. These advantages make EconBlock bricks particularly appealing in Singapore, where the construction industry prioritises sustainable and energy-efficient materials. These attributes have a direct correlation with the growing demand for innovative and sustainable building materials in Singapore's construction industry – and help to further solidify Kia Lim's market position.

• Industry consolidation led to record selling prices. The brick manufacturing sector has seen notable consolidation, intensified by the property market downturn and lockdowns related to the COVID-19 pandemic. The number of players has dwindled in Johor, resulting in a significant decline in brick capacity output. The industry faces high entry barriers, primarily due to substantial start-up costs for essentials like furnaces. This environment, coupled with recent high demand from Johor property developers, has pushed brick prices in the southern region to record highs, with a significant c.25% YoY increase. The price surge also helps offset rising input the costs of electricity, raw material, and labour.

• Undemanding valuation. Based on an ascribed P/E of 10x on FY24F earnings, we derived a fair value of MYR1.05. Key risks: Slowdown in the property market – especially in the southern region and Singapore, operational risks, and the loss of key customers.

Source: RHB Research - 22 Feb 2024