IN just the first month of 2015, Johor-based builder Kimlun Corp Bhd had already secured five projects, which are collectively worth RM422.2 million or 1.56 times the size of construction jobs it secured in 2014. However, investors and analysts remain unexcited about the counter.

There hasn’t been much effect on the share price of Kimlun (fundamental: 1.30; valuation: 2.40), which raises the question of whether the stock is undervalued. Nevertheless, the new contract wins are expected to contribute positively to the group’s earnings for the next three years.

In three contracts with a total value of RM144.5 million, Kimlun will construct apartments, houses and factories for United Malayan Land Bhd (UML). It will also build affordable apartments for UEM Sunrise Bhd and undertake infrastructure works for the Southern Industrial and Logistics Cluster for UEM Land Bhd, in jobs worth RM230.7 million and RM47 million respectively.

It is worth noting that Kimlun only clinched RM270 million worth of contracts last year, which was one-fourth of the new building jobs secured in 2013 of more than RM1 billion.

Although the job flow has started to pick up, Kimlun has failed to appeal to analysts who track it. Maybank Investment Bank Bhd, Kenanga Research, Hong Leong Investment Bank Bhd (HLIB) and AmResearch have rated the counter as “underperform” or “hold”.

Kimlun’s share price fell 46 sen or 26%, down from a 52-week high of RM1.75 on April 14, 2014, to settle at RM1.29 last Thursday. Year to date, the stock is up by 10 sen or 8.4%.

Kimlun CEO and executive director Sim Tian Liang tells The Edge that apart from the new order wins, analysts also consider the group’s construction margins and the sustainability of its order book.

“This is how the analysts think about us. Basically, I think they hold negative views about the property market. [So,] when there is a slowdown in the property market, naturally they would expect our order book to be affected,” he says, adding that the company is now mostly working on private jobs, which account for a major portion of its construction orders.

According to AmResearch analyst Max Koh, the market remains sceptical due to the diminishing margins over the years as well as the general slowdown in construction activities in Johor.

Kimlun expects its gross construction margin to shrink to 6% this year compared with 11% in the financial year ended Dec 31, 2011 (FY2011).

Koh, however, acknowledges that the RM422 million new job wins are encouraging as the group has been bidding for jobs more actively this year. The research house has a new order book assumption of RM600 million in 2015 for Kimlun, and an outstanding order book estimation of RM1.4 billion.

Meanwhile, Kenanga Research analyst Mohd Iqbal Zainal says investors are waiting for consistent earnings delivery from the company.

“Recall that Kimlun’s earnings came in below expectations in previous quarters due to weaker margins. Nowadays, it may not be enough if you have a fat order book. Investors like to see the company delivering sustainable and stable earnings,” he says.

For this year, Iqbal forecasts RM500 million in new contracts for Kimlun, and estimates the current outstanding order book at RM1.6 billion.

“We maintain our numbers for now. However, should Kimlun surpass our new job assumptions, we may revise our order book replenishment, but earnings revision is subject to the group’s ability to earn decent margins in the coming quarters,” he says.

HLIB, on the other hand, views the new contracts as merely making up for last year’s lacklustre job wins.

As at Dec 31, 2014, Kimlun had an estimated construction and manufacturing balance order book of RM1.19 billion and RM230 million respectively. It reported a lower net profit of RM9.15 million in 4QFY2014, down 28.6% from RM12.81 million a year ago, no thanks to the larger tax incentives recognised in 4QFY2013.

For FY2014, its net profit grew 26% to RM45.09 million, up from RM35.72 million in FY2013. The company declared a final single-tier dividend of 3.8 sen per share.

Interestingly, Kimlun executive chairman Pang Tin has been accumulating shares on the open market. As at Jan 15, he owned a 40.96% stake in the company, up from 40.217% as at April 30 last year.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on March 2 - 8, 2015.

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