Kimlun Corporation - a Rising Tide Lifts All Boats

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-0.16 (15.24%)

KIMLUN’s FY23 results beat expectations. Its FY23 core net profit plunged 81% due to its inability to effectively contain costs. However, it is poised to ride on the upturn in the construction sector underpinned by the roll-out of public infrastructure projects We maintain our FY24F earnings forecast but lift our TP by 7% to RM0.89 (from RM0.83) and maintain our MARKET PERFORM call.

KIMLUN’s FY23 net profit of RM7.1m beat our forecast and the consensus estimate by 7% and 23%, respectively (although not significant in absolute terms given its much reduced earnings base). It proposes a final NDPS of 1.0 sen, which is the same payout of 1.0 sen paid in 4QFY22.

YoY. Its FY23 revenue rose 13% largely driven by the acceleration of construction progress of the Sarawak Sabah Link Road project while there was no noticeable pick-up in sales of its pre-cast concrete products and no major new property launches. However, its net profit plunged 81% largely due to its inability to effectively contain costs.

QoQ. Its 4QFY23 revenue rose 24% as work progressed on construction projects secured in FY23. As a result, it returned to the black with net profit of RM6.7m from net loss of RM0.1m (which was due to elevated costs) Outlook. As at Dec 2023, its construction outstanding order book stood at RM1.9b (from RM1.86b three month ago) while that of manufacturing unit stood at RM300m (from RM290m 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) flood mitigation projects, (iii) Singapore Cross Island Line, (iv) semiconductor factories, and (v) MRT3.

Forecasts. We maintain our FY24F forecasts and introduce our FY25F numbers with earnings growth of 8% underpinned by job wins of RM800m vs. RM750m assumed for FY24F.

Valuations. We raise our TP by 7% to RM0.89 (from RM0.83) as we roll over our valuation base year to FY25F (from FY24f) based on an unchanged 10x 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).

Investment case. 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 RM1.9b which will keep it busy for the next 2-3 years. However, we are concerned over its inability to contain rising costs. Maintain MARKET PERFORM.

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 - 29 Feb 2024

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