Kimlun’s construction and precast margins could see sequential expansion going forward. Shortfall of RM300m on construction wins could come in early 2023. Several notable projects Kimlun intends to participate in are Kuching ART, PBH Phase 2, MRT3 and RTS. Management is guiding for required labour supply to normalise by Mar-2023. Labour shortage issues are likely to be a key priority for the new government, in our view. Precast should benefit from rollout of new MRT lines in SG. No change to forecasts. Maintain BUY with unchanged TP of RM0.85.
Below Are the Key Takeaways From Last Week’s Briefing:
Review of 3QFY22. Kimlun’s 3QFY22 earnings surged to RM16.2m increasing by 83.0% QoQ. Precast was the key profitability driver with strong SGD/MYR driving GPM by roughly 3% higher vs normal range of 18-20%. The segment also realised some profits from internal supply to construction arm. Billings on the construction side picked up but profitability was diluted by weaker margins from inflation. Property contribution was marginal during the quarter.
Construction. Kimlun’s outstanding orderbook amounts to RM1.39bn, translating to a decent 2.8x cover. Contribution from its new projects has increased and should continue picking up next year led by its SSLR contract. Management is guiding for stable to slightly improving construction margins going forward given the weakening trend of steel prices. Nonetheless, cement prices have started rebounding to year high in Nov-22, thus would put a lid on the potential margin improvements. Recall that in 1QFY22 and 2QQFY22, Kimlun has accounted for inflationary costs in their project margin assumptions. On the replenishment side, management is unlikely to meet target of RM500m wins having only accomplished ~RM200m worth of contracts so far. Part of this shortfall is likely rolled forward to early next year where we believe would comprise of private sector jobs. Existing tenderbook ranges between RM800- 900m comprising of private sector jobs, Kimlun has conservatively excluded public sector projects amidst the changes post GE15. Several notable projects Kimlun intends to participate in are Kuching ART, PBH Phase 2, MRT3 and RTS.
Labour. Total approved foreign worker quotas stands at 737 whereby only 70 have been physically deployed. Estimated timeline for numbers to arrive fully is March- 2023. Management does not envisage a need to top up considering current orderbook levels. Reading from pre-GE15 parliamentary remarks, we reckon the new government will place solving foreign worker shortage as a key priority going into 2023.
Manufacturing. Outstanding manufacturing orderbook stands at RM350m. External contract wins for FY22 stands at RM122m (98% from SG). Company is receiving orders from Jurong Region Line (JRL) and Cross Island Line (CIL) railway projects in SG. Both are new railway lines stretching a total 70km to be developed in phases. According to the company, they have won 2 packages for the CIL and have outstanding tenders for another 4. It is worth nothing that CIL is a fully underground line and thus would yield higher margin opportunities for Kimlun. On forex, 4QCY22 margins could expand aided by further depreciation vs SGD.
Forecast. No Change.
Maintain BUY, TP: RM0.85. Maintain BUY with unchanged TP of RM0.85. TP is derived from pegging mid-FY22 EPS to 8.0x target P/E multiple (unchanged), a reasonable range for small cap contractors. The stock currently trades at a decently attractive FY23 P/E of 5.3x and P/B of 0.33x (-1.5SD 10 year range).
Source: Hong Leong Investment Bank Research - 5 Dec 2022
