Investment Merits

• Commendable construction track record with property developers in Johor and the Klang Valley
• Experienced in completing heavy engineering projects such as highways and hospitals
• Johor, Klang Valley and Sarawak to be key drivers for orderbook expansion
• Mass Rapid Transit (MRT) 3 and Penang Light Rail Transit (LRT) rollout may boost domestic contributions from the precast segment, which is currently heavily focused on Singapore

Company Profile

Kimlun Corp (KICB) is a well-established building contractor in Johor with a growing presence in Sarawak. Its strong client base comprises key property developers in Malaysia, while jobs in Sarawak mostly focus on public sector infrastructure projects such as highways. It also manufactures precast concrete products, consisting largely of segments used in MRT projects (both in Malaysia and Singapore) and industrialised building systems (IBS) used in the mass housing market and commercial buildings. It is also involved in property development in Malaysia, with c.270 acres of land bank in matured areas across the Klang Valley and Johor.

Highlights

A solid track record in Johor. KICB secured c.MYR0.8bn worth of jobs in Johor Bahru in FY23. Catalysts in the form of the Johor–Singapore Special Economic Zone (JSSEZ), Johor Bahru-Singapore Rapid Transit System Link (RTS), and likely the Johor Bahru LRT (estimated at MYR20bn) may not just lead to the construction of more property development projects in Johor, but also necessitate other forms of infrastructure such as highways. The group also clinched c.MYR0.5bn worth of new jobs in the Klang Valley in FY23.

Orderbook trend. For FY24, KICB has, so far, secured c.MYR650m worth of new contracts related to property projects in Johor Bahru. Taking into account these job wins, we estimate that its unbilled construction orderbook stands at MYR2-2.2bn as of Apr 2024 – likely the highest level since its listing. This translates to a construction orderbook-to-revenue cover ratio of between 3.1x and 3.4x. Management aims for the job replenishment rate for construction to be in the range of MYR800m and MYR1bn – we think KICB will surpass this level, due to the heightened construction activities in Johor and Sarawak. The tenderbook of its construction arm stands at c.MYR1.4bn.

Sarawak’s higher development expenditure of MYR5.8bn under Budget 2024 could expedite the rollout of projects like Phase 2 of Pan Borneo Highway Sarawak, and Sabah-Sarawak Link Road Phase 2. As such, KICB is in a sweet spot to leverage on more Sarawak projects, given its track record in Pan Borneo Highway Sarawak and its current involvement in Phase 1 of the Sarawak-Sabah Link Road (SSLR; >30% complete). Another angle of opportunity would be its participation in the Kuching Autonomous Rapid Transit project via the supply of columns and beams.

We do not discount the possibility of KICB participating in bids for other projects, especially in Johor, as the Government has allocated MYR1.6bn for flood mitigation projects in the state, involving the Muar River Basin in Segamat and Johor River Basin covering Kota Tinggi and Batu Pahat.

Company Report Card

Results highlights. The group reported a core profit of MYR7.1m (-79% YoY). Despite better revenue growth (+13% YoY) in FY23 – backed by the construction segment (which saw improved progress of ongoing projects) – the weak bottomline stemmed from a compression in overall GPM to 7.2% from 11.4% in FY22, owing to the manufacturing & trading division which incurred higher fixed overheads relative to its revenue.

Gearing position. KICB’s net gearing reached 0.48x in FY23 vs 0.33x in FY22. While we expect net gearing levels to rise in FY24 as the group gears up for more jobs, KICB recorded its highest net gearing level of 0.60x back in FY13 – a year before it registered its second highest revenue since its listing of MYR1.2bn. Hence, we view the anticipated rise in net gearing as in line with the group’s growth.

ROE. ROE fell to 1% in FY23 from 5% (based on core profit) in FY22. We expect this to improve in the years ahead, given its bright orderbook replenishment prospects.

Dividends. KICB has been paying out dividends every year since its 2010 listing, with payout ratios of 19-50%. It even paid out dividends worth MYR3.5m in relation to FY21, despite recording a core net loss. We believe such payout trends will be sustained by its healthy net operating cash flow generation, backed by its job replenishment trends.

Management. KICB is led by Executive Chairman Pang Tin @ Pang Yon Tin and CEO/Executive Director, Sim Tian Liang – they were appointed to the board in 2009. Pang and Sim have over 30 years of experience in the construction industry. They are assisted by other board members who collectively have extensive experience in engineering, quantity surveying, financial management and reporting, and legal practice.

Investment Case

Valuation. KICB’s FV of MYR1.59-1.71 is based on 13-14x FY25F P/E, which is higher than the benchmark valuation ascribed to the small- to mid-cap contractors under our coverage of 10-12x. This is to reflect KICB’s premium due to its presence in Johor and Sarawak (the two states that are set to see increased construction activity), combined with its precast exposure in Singapore. We think growth prospects are strong as the JSSEZ, coupled with Sarawak’s infrastructure expansion wave, should provide job replenishment opportunities for KICB.

Key risks include unexpected volatility in building material costs and a slowdown in job rollouts.

Source: RHB Securities Research - 15 May 2024