Kimlun construction revenue seen to pick up pace

Kimlun Corp Bhd (Dec 21, RM2.22)

Maintain market perform with an unchanged target price of RM2.27: Kimlun Corp Bhd has announced that it is acquiring 29 acres (11.74ha) of freehold agriculture land in Iskandar Puteri for RM82 million (RM65 per sq ft). We are “neutral” on the acquisition as we wait for more concrete details on future development plans while noting that net gearing level post acquisition remains manageable. No changes to our financial year 2017 (FY17)to FY18 earnings estimates as we expect developments to take place from FY19.

Kimlun’s announcement this week of its acquisition of the land in Iskandar Puteri, Johor Bahru represents a slight discount over an independent market valuation of RM83 million (or RM66 per sq ft). The land is located at a relatively developed area and is along Jalan Kampung Lalang near Horizon Hills, Eco Botanic, Taman Nusa Sentral, and Medini Iskandar. The transaction is expected to be completed by the fourth quarter of FY18 (4QFY18) and a further six to 12 months will be needed to convert the said land from agriculture to commercial for mixed-development purposes. Hence, we only expect developments on the newly acquired land to take place the earliest from FY19 onwards.

While management is still uncertain over the potential gross development value (GDV) figures, based on a land/GDV ratio of 10% to 15% of which we have factored in a 20% conversion premium on the acquisition cost of RM82 million, we would expect the land to generate a potential GDV range of RM650 million to RM1 billion.

Currently, Kimlun’s outstanding construction order book stands at RM2.1 billion, providing visibility for the next two years. Note that year-to-date construction wins stand at RM940 million, making up 94% of our FY17 replenishment target. Moving forward, we expect construction revenue to pick up pace as major projects, such as the Pan Borneo Highway, move into more advance billing stages.

As for its manufacturing arm, Kimlun has secured RM90 million of manufacturing orders, making up 30% of our RM300 million targeted replenishment. Replenishment target is backed by potential Singapore manufacturing packages, namely the Deep Tunnel Sewerage System Phase 2, mass rapid transit (MRT) Circle Line 6, and North South Corridor Expressway. Current outstanding manufacturing order book stands at RM350 million, providing visibility for two years. We anticipate contributions from the KVMRT2 tunnel lining segment and segmental box girders to continue picking up pace in 4QFY17.

Post-acquisition, we make no changes to our FY17 to FY18 earnings estimates as we only expect developments to take place from FY19 onwards. While Kimlun’s applied valuation is at the lower end of our targeted small- to mid-cap peers’ range of eight times to 13 times, we believe it is justifiable as Kimlun’s average FY17 to FY18 profit after tax margin of 7% is weaker compared with the average margins of 9% of peers (Kerjaya Prospek Group Bhd, Hock Seng Lee Bhd, Mitrajaya Holdings Bhd). — Kenanga Research, Dec 21

This article first appeared in The Edge Financial Daily, on Dec 22, 2017.

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