Kimlun Corp Bhd (Nov 30, RM2.07)

Maintain buy with an unchanged fair value (FV) of RM2.44: We maintain our “buy” call, forecasts and FV of RM2.44 based on 11 times forecast earnings per share for the financial year ending Dec 31, 2017 (FY17), in line with our one-year forward target price-earnings ratio of 10 to 12 times for small-cap construction stocks, following Kimlun Corp Bhd’s results for the nine months ended Sept 30, 2016 (9MFY16) that met 79% and 77% of our and consensus full-year forecast estimates respectively. For 9MFY16, Kimlun’s net profit surged 17% year-on-year driven by improved margins from the construction division (due to high margin jobs and lower fuel and material prices) and the concrete products unit (due to lower volumes of low margin products, better economies of scale and export sales benefiting from Singapore dollar’s strength against ringgit).

Year to date, Kimlun’s construction division has bagged RM1.1 billion worth of new jobs (versus RM700 million for the whole of FY15), boosting its order book to RM1.93 billion, which will keep it busy for the next two years.

In an analyst briefing in September, Kimlun guided for job wins of RM1.3 billion to 1.4 billion in FY16 (versus our assumption of RM1.5 billion), and for this to subsequently moderate to RM600 million to RM800 million in FY17 (versus our assumption of RM700 million to RM800 million).

Kimlun expects job wins over the remainder of FY16 and FY17 to come largely from affordable high-rise residential developments.

Meanwhile, its manufacturing order backlog has almost doubled to RM300 million from RM170 million six months ago, thanks largely to the RM199.9 million contract to supply segmental box girders to mass rapid transit (MRT) Line 2, announced in March. We expect its manufacturing order backlog to sustain at the RM200 million to RM300 million level with the impending award of a contract to supply tunnel lining segments to MRT Line 2 (likely to be larger than the same contract it won from MRT Line 1 years ago worth RM49 million), as well as recurring orders from various infrastructure projects in Singapore.

Kimlun is a good proxy to the booming local construction sector given its involvement in MRT Line 2 (supply of precast concrete segments), Pan Borneo Highway and the construction of affordable housing.

Its earnings profile has improved tremendously as it no longer relies solely on residential building jobs, after expanding into the construction of a hospital (Gleneagle Medini), a shopping mall (IGB’s Southkey Megamall) and hostels (Sime Darby’s Pagoh Education Hub), as well as infrastructure (a section of Pan Borneo Highway via a 30%-owned joint venture with Zecon Bhd). Similarly, its manufacturing unit has widened its product offering with the latest being rail sleepers (for the Thomson Line in Singapore) and parapet walls. — AmInvestment Bank, Nov 30

This article first appeared in The Edge Financial Daily, on Dec 1, 2016. Subscribe to The Edge Financial Daily here.

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