Investment Highlights

• We upgrade Kimlun Corp (Kimlun) to BUY from HOLD with a higher fair value of RM1.09/share vs. RM0.69/share previously. Our fair value of RM1.09/share for Kimlun is based on a FY23F PE of 9x, in line with our benchmark for small-cap construction stocks. There is no FV adjustments for ESG based on our 3-star rating.

• 9MFY22 core net profit (CNP) of RM17mil was above our forecast but within consensus, accounting for 93% of our FY22F earnings and 71% of consensus estimates.

• The deviation came mainly from higher than expected manufacturing profits. As such, we raise our earnings for FY22F by 24%, FY23F by 66% and FY24F by 43%.

• 9MFY22 CNP surged 14.3x YoY to RM16.8mil from RM1.2mil in 9MFY21, supported by the manufacturing & trading segments together with a low base effect from movements restrictions last year.

• Manufacturing & trading segment’s gross profit (GP) grew 2.7x YoY due to better margin sales order and operating leverage as production ramped up post-Covid and favourable SGD/MYR movements.

• Despite construction revenue (+15% YoY) improving to RM424.8mil, GP fell 68% YoY to RM4.4mil in 9MFY22 due to higher raw material costs.

• Property development revenue slid 34% YoY to RM32.2mil in 9MFY22 while GP fell 25% YoY to RM4.2mil as Phase 1 of Bukit Bayu Development was fully sold in 1QFY22. Future sales are expected to come from 100 Trees Private Estate in Bandar Seri Alam, Johor which has an estimated GDV of RM61mil.

• 3QFY22 CNP almost doubled to RM18.1mil, mainly due to higher GP contribution (+45% QoQ) from the manufacturing & trading segments. This can be attributed to positive FX movements and better margin sales orders.

• Outstanding order book declined by 9% QoQ to RM1.7bil as at 30 Sep 2022 from RM1.9bil as at 30 Jun 2022 due to higher progress billings. The order book of RM1.7bil comprise RM1.4bil for construction (3x of FY23F construction revenue) and RM0.3bil for manufacturing & trading (1.6x of FY23F manufacturing & trading revenue). Ongoing projects include Sarawak-Sabah Link Road (RM0.8bil) and supply of precast concrete components in Singapore (S$51.7mil).

• We raise our overall order book replenishment assumption to RM800mil from RM650mil previously. Potential wins are expected to include domestic jobs such as Phase 2 of Pan Borneo Highway Sarawak, Autonomous Rapid Transit Sarawak, Johor-Singapore Rapid Transit System, hospitals and affordable housing projects, as well as supply of precast concrete projects in Singapore.

• We also believe that Kimlun would benefit from the construction of Mass Rapid Transit 3, where sub-contracts will be awarded in FY23F. Recall that in 2012 and 2016, Kimlun bagged supply contracts worth RM524mil involving tunnel lining segments and segmental box girders for MRT1 and MRT2.

• Challenges faced by Kimlun include: (i) weaker-than-expected recovery of job flows; (ii) eroding profit margins from rising building material costs and labour shortages; and (iii) delays/cost revisions of mega projects.

• We think the stock is undervalued as it is currently trading at an attractive 5.8x FY23F PE, below our 9x benchmark for small-cap construction stocks and decent dividend yields of 4.8%.

Source: AmInvest Research - 30 Nov 2022