Kimlun Corp Bhd (May 9, RM2.35)

Maintain hold call with an unchanged target price (TP) of RM2.27: Kimlun Corp Bhd announced that its 40% joint venture (JV) (JBB Kimlun Sdn Bhd) has secured a RM263 million contract from Astata Padu Sdn Bhd which involves the construction of a one-block office complex for Johor Bahru Town Council in Plentong, Johor. The job is estimated to be completed by October 2019.

Based on Kimlun’s 40% share in the JV, its scope of work amounts to RM105 million. However, we do not discount the possibility of Kimlun undertaking a larger chunk of the job at the working level. This represents Kimlun’s first announced contract win for the year.

As of end financial year 2016 (FY16), Kimlun’s order book stood at RM1.9 billion, comprising RM1.7 billion for construction and RM260 million for manufacturing. This translates into an overall cover of 2.1 times on FY16 revenue which is healthy considering the relatively fast turnaround nature of its jobs.

Overall, management is comfortable to achieve new job wins of RM600 million to RM700 million for FY17. However, this could surprise on the upside should Kimlun manage to secure chunky jobs such as the Light Rail Transit Bandar Utama-Klang line where it has been invited to bid for two viaduct packages.

While Kimlun posted a record profit in FY16 of RM82 million, this could potentially stage a decline in FY17. This is due to: i) downward normalisation in construction margins, and ii) timing gap for its manufacturing division relating to the completion of Singapore’s SMRT Thompson Line and commencement of Mass Rapit Transit Sungai Buloh-Serdang-Putrajaya line.

As year-to-date job wins of RM105 million are still within our full-year assumption of RM700 million, we maintain our earnings forecast. We maintain our “hold” rating on Kimlun in view of the potential earnings decline (-14% year-on-year) that is expected this year. Our TP of RM2.27 is based on a 10 times price-to-earnings multiple ascribed to FY17 earnings. Risks include slowdown in Iskandar Malaysia, hampering new job wins for the construction division. — HLIB Research, May 9

This article first appeared in The Edge Financial Daily, on May 11, 2017.

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