This article first appeared in The Edge Financial Daily, on March 15, 2016.
Kimlun Corp Bhd
(March 14, RM1.71)
Maintain buy with a higher target price (TP) of RM2.38: Within our construction universe, Kimlun Corp Bhd stands out as the most direct small-cap proxy to mass rapid transit (MRT) projects. In spite of the three-year earnings per share (EPS) compound annual growth rate of 30% and decent yields of about 2% to 2.3% with stronger order replenishment ahead, Kimlun is currently trading at a bargain valuation of 7.9 times financial year 2016 (FY16) EPS.
We estimate its construction order book stands at RM1.6 billion, inclusive of year-to-date wins of about RM700 million and the recent Pan Borneo Highway contract. Of the RM1.6 billion construction order book, we estimate 32% is infrastructure-related. We believe its exposure to the property market in Johor will be partially offset by more infrastructure-related contract wins.
Moreover, clinching the Pan Borneo Highway contract worth RM1.46 billion further validates its ability to potentially win more infrastructure-related jobs going forward. The contract was awarded for the development and upgrading work of the Serian to Pantu Junction roundabout, slated to be completed by 2020 with a contract duration of 48 months. Together with its joint-venture partner Zecon Bhd, Kimlun will hold a 30% stake, implying its share is worth RM438 million.
Kimlun remains confident it will bag some packages for MRT Line 2. If Kimlun manages to clinch a similar 50% market share for tunnel lining segment (TLS) and segmental box girder (SBG) works for MRT Line 2, the contract value would be higher than for MRT Line 1 as the length of the rail is longer. MRT Line 1 is 51km long, of which 9.5km will be underground, while MRT Line 2 is 52.2km in length, of which 10.2km will be underground. The tender for SBG works closed in December 2015, and the tender for the supply of TLS has yet to be called by Mass Rapid Transit Corp Sdn Bhd.
We raise our TP to RM2.38 (from RM2.26) based on 11 times FY16 forecast price-earnings ratio as we raise our earnings estimates. This is a tad below +1 standard deviation of its historical mean of 11.5 times and a 15% discount to the sector average. We think this is justified given its impeccable earnings delivery, bullish prospects to build up its order book and its positioning as a direct MRT proxy.
The biggest risk for Kimlun is its perceived over-reliance on projects in Johor. We think this is mitigated by its stringent bidding process, where it only accepts projects from strong clients, while also judging the ability of the projects to sell. — AllianceDBS Research, March 14