This article first appeared in The Edge Financial Daily on March 15, 2019

Kimlun Corp Bhd
(March 14, RM1.23)
Maintain underweight with a fair value (FV) of RM1.14: The FV is based on eight times (8x) FD financial year 2019 forecast (FY19F) earnings per share (EPS), in line with our benchmark forward target price earnings (PE) of 8x for small-cap construction stocks.

Kimlun did not appear to be too excited over the prospects of the revival of the East Coast Rail Link (ECRL) project. The company said that before the suspension of the project prior to the 14th general election, it had been shown price quotations for the supply of various precast concrete products to the project. It decided not to pursue as it found them highly unattractive.

It reiterated its narrative six months ago that the local construction and building material sectors are bracing for a very challenging time ahead (particularly, in terms of cash flow management), and hence, it prioritises credit risk management overgrowing its earnings. It will focus on existing clients (mostly blue-chip property developers) who have proven to be good paymasters. It has not set itself a hard target for order book replenishment in FY19F.

Having said that, Kim Lun is hopeful for new construction job wins to the tune of RM600-800 million in FY19F (which is in line with our assumption of RM700 million annually in FY19-21F). The new jobs are most likely to come from affordable housing projects and basic infrastructure works for township development. Kimlun only secured new construction contracts worth about RM600 million in FY18.

At present, Kimlun’s outstanding construction order book stands at RM1.9 billion which shall keep it busy for the next two years. Similarly, its precast concrete product division has an order backlog of about RM300 million that should also keep it busy over the next two years as well.

We hold the view that the current slowdown in the local construction industry sector is no ordinary sector cyclical downturn, but a secular change to the sector’s fundamentals, triggered by a major cutback in public infrastructure spending over the medium term as the government adheres to fiscal prudence and  the permanent reduction in overall margins for players in the absence of high-margin directly negotiated government jobs, as the government observes higher standards of transparency and accountability in public procurement.

Kimlun’s valuations as a small-cap construction stock are unattractive at nine times forward earnings on muted sector prospects. — AmInvestment Bank, March 14