KIMLUN presented another disappointing set of result in 3QFY24 as high operating costs continued to crimp its earnings. 9MFY24 core profit only registered at RM1.5m despite revenue rising by 38%. Going forth, topline is expected to grow further on the back of its strong order book but high operating costs will compromise bottomline growth. We cut FY24/FY25 earnings forecast by 59%/34% and TP by 20% to RM1.36. Downgrade the stock to MP.

9MFY24 results below. KIMLUN managed to turnaround in 3QFY24 with core profit of RM2.8m, bringing YTD 9MFY24 to core profit of RM1.5m against our FY24 net profit forecast of RM21.3m and RM33.7m for consensus estimates. This was due to input costs remaining high. No dividend was declared as expected as it usually only pays a final dividend.

Turnaround QoQ but not good enough. With higher revenue (+15%), largely driven by the acceleration of construction progress of the Sarawak Sabah Link Road and manufacturing revenue (+19%), it returned to the black with core profit of RM2.8m in 3QFY24 from core loss of RM1.8m in the preceding quarter.

Small improvement for YoY results. Similarly, higher construction progress claim boosted topline with YTD 9MFY24 revenue leaping 38% to RM811.2m. This lifted core profit slightly higher to RM1.5m from RM0.4m in 9MFY23. However, operating costs surged higher with selling and admin expenses jumping 57% and finance costs rising 54% over the year.

Outlook. As at Sep 2024, its construction outstanding order book stood at RM3.16b (from RM3.15b three month ago) while that of manufacturing unit stood at RM370m (from RM330m previously).

Moving forward, we expect a better outlook for KIMLUN in FY25 backed by the roll-out of public infrastructure projects with improved profit margin after a work prolongation, and escalation in input and labour costs previously. We understand that KIMLUN is eyeing work packages and pre-cast concrete product orders from: (i) Pan Borneo Sarawak Phase 2, (ii) flood mitigation projects, and, (iii) semiconductor factories.

Forecasts. Downgrade FY24/FY25F earnings forecasts by 59%/34% to adjust for higher operating cost despite higher revenue. This is on the back of lower PBT margins of 1.1%/3.0% from 2.7%/4.5% previously.

Nonetheless, we keep our NDPS assumption of 1.0 sen.

Valuations. Post earnings revision, we cut our TP by 20% to RM1.36 from RM1.69, based on unchanged 12x FY25F PER for its construction business, at a discount to the 22x we ascribed to mid-sized to large contractors given KIMLUN's much smaller size and poorer earnings quality. 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 is backed by a construction outstanding order book of RM3.16b which will keep it busy for the next 2-3 years. Downgrade the stock to MARKET PERFORM from OUTPERFORM.

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 Nov 2024