Kimlun expects construction and manufacturing margins to trend lower

Maintain outperform with an unchanged target price (TP) of RM2.51: Yesterday, we attended Kimlun Corp Bhd’s first half of financial year 2016 (1HFY16) results briefing and came away reaffirmed on the company’s positive outlook which is underpinned by RM2.23 billion of outstanding order book and increasing demand for industrialised building systems (IBS) or precast products. Key takeaways from the briefing include construction and manufacturing order book updates, business strategy for the property division and the future company outlook.

As of the first eight month of FY16 (8MFY16), Kimlun’s construction division racked up RM1.1 billion of contracts, in line with our RM1.1 billion replenishment target. While management believes it can secure another RM200 million to RM300 million of jobs from the affordable housing space, bringing FY16 replenishment to about RM1.3 billion to RM1.4 billion, potentially surpassing our FY16 target, we are still keeping our FY16 target unchanged as we believe that the timing of these potential wins might cross over to FY17, which would be within our FY17 replenishment target of RM1 billion. In terms of management’s target, it is looking at RM700 million to RM800 million for FY17.

Kimlun’s manufacturing division recorded RM230 million worth of contracts for 8MFY16. We believe Kimlun is on track to meet our FY16 manufacturing target of RM300 million from the potential tunnel lining segment (TLS) order award for the Klang Valley Mass Rapid Transit Line 2 (KVMRT 2) which is due to be announced soon. To recap, Kimlun had secured the TLS order contract for KVMRT 1 amounting to RM48.5 million. As of 1HFY16, Kimlun’s total outstanding order book stood at RM2.23 billion with construction consisting RM1.93 billion while manufacturing had RM300 million, providing earnings visibility for the next two years.

As of July 2016, Kimlun completed its maiden property project “The Hyve”, with a gross development value (GDV) of RM232 million with an unsold portion worth RM33 million. It is currently having an ongoing project, namely Taman Puteri@Pekan Nenas, Johor, with a GDV of RM48 million, offering 131 units of semi-detached and double-storey terraced houses recording 35% take-up, which is slated for completion soon. Moving forward, management has no planned launches for the next 12 months, but instead plans to focus on clearing inventories from its existing developments by offering higher rebates, buyer-to-buyer schemes and engaging external agents to deliver sales. In terms of future development prospects, management indicated that it does not rule out the possibilities of securing new land banks for pocket developments through joint-venture structures with landowners. However, we opine that it would not happen in the near to mid-term given the weak sentiment in the property market.

While management expects construction and manufacturing margins to trend lower going forward due to the commencement of Pan Borneo Highway construction and KVMRT 2 segmental box girder supply orders, we have incorporated these expectations into our estimates.

We continue to believe that Kimlun’s prospects remain bright, underpinned by about RM800 million of construction tender book within the affordable housing and infrastructure space. For instance, its manufacturing arm is targeting precast viaducts for Light Rail Transit Line 3 and TLS supplies and jacking pipes for Singapore’s MRT lines (new and existing) and the Deep Tunnel Sewerage System project (phase 2) respectively. On the other hand, Kimlun’s IBS division could further benefit from increasing demand in affordable housing projects in line with the 11th Malaysia Plan.

Post-briefing, we make no changes to earnings estimates as we have already incorporated lower margin assumptions for FY17 as guided by management. We maintain our “outperform” call with an unchanged TP of RM2.51 based on applied nine times FY17 price-earnings ratio. We believe valuation is justifiable as it is in line with the targeted small/mid-cap peers’ range of nine times to 13 times. — Kenanga Research, Sept 22

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This article first appeared in The Edge Financial Daily, on Sept 23, 2016. Subscribe to The Edge Financial Daily here.