Kimlun Corp Bhd
(Aug 9, RM1.51)
Maintain hold with an unchanged target price of RM1.66: Progress of Pan Borneo Sarawak work package secured by Kimlun Corp Bhd’s 30%-owned joint venture is ongoing with a completion rate of 30%. The work is expected to expedite in the near term after resolving the utility relocation issue. We understand that the work package is less likely to be affected by cost review by the federal government as the package was awarded through an open tender. Moreover, the package is unlikely to be shelved due to its strategic location that connects Kuching.
Kimlun has secured two new construction contracts with a total value of RM198 million year to date (YTD). Its outstanding construction order book now stands at around RM1.6 billion, assuming a burn rate of RM200 million in the second quarter of 2018 (2Q18), translating into 1.8 times cover on financial year 2017 (FY17) construction revenue. Management is targeting to secure another RM400 million to RM700 million of new construction jobs for FY18. However, we maintain our order book replenishment assumption of RM500 million given the slowing contract flows following the change in government post 14th general election (GE14).
Following the change in government post GE14, we turn cautious about the overall macro job flow outlook for the construction sector. The high-speed rail and the third mass rapid transit projects have been shelved while terms of the East Coast Rail Link project are being renegotiated and the third light rail transit project has been downsized due to review of megaprojects. As a result, about RM105 billion worth of local content of megaprojects will be removed over the next two years based on our estimation. Although Kimlun has been less involved in public infrastructure construction jobs relative to private-sector jobs in the past, we reckon competition for private-sector jobs will intensify going forward as other contractors start bidding more aggressively within this space.
YTD, Kimlun has secured new sales order for tunnel lining segments and precast concrete building components amounted to S$39 million (RM116.6 million). Its manufacturing order book stands at around RM410m (assuming a burn rate of RM30 million in 2Q18), representing 4.2 times cover on FY17 manufacturing revenue. Going forward, manufacturing job wins are likely to be driven by the Deep Tunnel Sewerage Phase 2 (S$2.3 billion) project in Singapore which has already been awarded to five main contractors that Kimlun will bid to supply precast tunnel segments. — Hong Leong Investment Bank Research, Aug 9