Kimlun Corp Bhd (Sept 18, RM2.19)
Maintain market perform call with an unchanged target price of RM2.27: Last Friday, Kimlun Corp Bhd announced that it had secured a building project worth RM214.8 million from Hillcrest Gardens Sdn Bhd. The project comprises construction works for two blocks of condominiums and ancillary buildings at Mukim Petaling, Selangor slated for delivery in June 2020.
We remain “neutral” on this contract given that year-to-date (YTD) construction wins of RM815 million are still within our financial year 2017 estimate (FY2017E) replenishment target of RM1.0 billion — accounting for 82% with a remainder of RM185 million to be achieved. Assuming pre-tax margin assumptions of 8%, the contract will contribute about RM4.7 million to Kimlun’s bottom line per annum.
For the remainder of FY2017, we believe our FY2017E replenishment target of RM1 billion is achievable, backed by affordable housing projects given their pioneer status as an industrialised building system player, which allows for speedier construction and less labour requirements.
Current outstanding construction order book stands at about RM2.1 billion providing visibility for the next two years. Meanwhile, we expect construction works from the Pan Borneo Highway, which makes up about 30% of their outstanding order book to only pick up at a quicker pace from the second half of financial year 2018.
YTD, Kimlun has secured about RM90 million of manufacturing orders making up 30% of our RM300 million targeted replenishment. Replenishment target is backed by potential Singapore manufacturing packages — the Deep Tunnel Sewerage System phase 2, mass rapid transit Circle Line 6 and North-South Corridor expressway — to be awarded within 4QFY2017.
Current outstanding manufacturing order book stands at RM330,000 million providing visibility for about two years. Post award, we make no changes to our FY2017 to FY2018E earnings forecasts.
Maintain our market perform call with an unchanged TP of RM2.27 based on an applied nine times FY2018 price-earnings ratio.
While Kimlun’s applied valuation is at the lower end of our targeted small- and mid-cap peers’ range of nine to 13 times, we believe it is justifiable as their average forward FY17 to FY18E profit after tax margin of about 7% remains weaker compared with average peers’ such as Kerjaya Prospek Group Bhd, Hock Seng Lee Bhd and Mitrajaya Holdings Bhd margins of about 9%.
Although Kimlun’s earnings outlook remains stable, catalysts are lacking. — Kenanga Research, Sept 18
This article first appeared in The Edge Financial Daily, on Sept 19, 2017.