Kimlun’s profit seen to remain stable on higher manufacturing margin

Kimlun Corp Bhd (Sept 26, RM1.24) Maintain buy with an unchanged target price (TP) of RM1.58: Kimlun Corp Bhd’s outstanding construction order book now stands at about RM1.7 billion, translating into 2.1 times cover on financial year 2018 (FY18) construction revenue. The year-to-date (YTD) sum of job wins amounted to RM270 million with 80% from building jobs and the rest from infrastructure. The management stressed that RM500 million to RM600 million replenishment remains intact and future job bidding will be focused on affordable housing developments due to strong demand for such homes.

Progress in the Pan Borneo Highway Sarawak (PBH) package secured by Kimlun currently stands at about 60% and hence we do not expect any drastic change to the package after the removal of the project delivery partner given the advanced stage of its works. Kimlun is not actively participating in the tender for other Sarawak state-related projects such as the Coastal Road project as the company prefers to focus on the execution of the PBH package.

Kimlun’s manufacturing order book stands at RM300 million, representing about 1.5 times cover on FY18 manufacturing revenue. FY19 manufacturing job wins are expected to be in the range of RM80 million to RM120 million with YTD job wins at RM60 million. Going forward, manufacturing job wins are likely to be driven by the extension of the Singapore Mass Rapid Transit rail network and North-South Corridor Expressway.

There is no ongoing development carried out by Kimlun on its existing land bank totalling 204 acres (82.55ha) and no new launches are expected in the foreseeable future due to the persistent weakness of the property market.

Going forward, we understand that revenue contributions from the manufacturing segment will step up and partially offset the weakness in the construction segment caused by the current domestic construction industry slowdown. However, we expect profit of the overall group to remain stable as its manufacturing segment margin is generally higher and hence offsetting the shortfall in revenue. We maintain our forecasts as the briefing yielded no major surprises.

Thus, we maintain our “buy” rating with an unchanged TP of RM1.58. The TP is pegged at eight times FY19 earnings. We like Kimlun for its execution capability and undemanding valuations. The stock is trading at 6.3 times price-earnings ratio on FY19 earnings, representing -1.6 standard deviation below its five-year historical average. — Hong Leong Investment Bank Research, Sept 26

Source: TheEdgeMarkets