KIMLUN CORP BHD chief executive Sim Tian Liang acknowledges that things are slowing down in the construction section.
There is no doubt that major infrastructure projects are in the pipeline, such as the Mass Rapid Transit (MRT) Line 2, Light Rail Transit (LRT) Line 3 and Petroliam Nasional Bhd’s (Petronas) Rapid project. But, in his opinion, these jobs are not expected to be awarded soon.
Nonetheless, Sim doesn’t seem to be overly worried. That’s because Kimlun is winning jobs across the causeway.
The stronger Singapore dollar, which appreciated to RM2.7876 last Friday from RM2.6471 in early January, is working in Kimlun’s favour.
“Right now, jobs in Singapore are more promising. They are smaller, but more consistent and less lumpy,” Sim tells The Edge.
Kimlun is looking forward to securing some jobs from Singapore’s MRT line extension works, he says. These include packages for the MRT lines as well as electrical cable tunnelling jobs, he says, noting that Kimlun has been able to win jobs in the highly competitive market there.
The Singaporean government is planning to double its rail length under its 2013 Land Transport Master Plan.
The new 20km Jurong Region Line is expected to be completed by 2025, while the extension of the Circle Line, Downtown Line and the Northeast Line will add about 8km by 2030.
On top of that is a proposed 50km cross-island line that is due by 2030.
Most of these projects will have substantial underground sections that require the pre-fabricated concrete that Kimlun is manufacturing in Johor, where production costs are relatively lower than in the island republic.
Sim notes that the weaker ringgit not only helps widen the profit margin of existing jobs, but also makes Kimlun more competitive in bidding for future packages in Singapore.
The company isn’t overly-reliant on Malaysian mega projects to replenish its manufacturing order book. More than half of its pre-fabricated concrete product manufacturing order book is denominated in Singapore dollars — about RM131 million worth — for various infrastructure projects in the island state.
Manufacturing orders at home amount to about RM135 million, according to Sim.
Despite the gloomy outlook for corporate earnings, Kimlun managed to chalk up strong profit growth in the first financial quarter ended March 31. The Johor-based company’s core net profit ballooned 73% y-o-y to RM14.1 million in the quarter after stripping out a gain of RM15.4 million from disposals in the previous corresponding quarter.
In the first quarter, Kimlun’s construction revenue rose 26.5%, driven by larger project billings. But more importantly, the division delivered better profit margins, up 0.4 percentage points to 6.7% mainly owing to its order book entering the mid-stage of construction, according to Kenanga Research.
Kimlun is relatively well-positioned to weather the current slowdown. The group boasts an order book of RM1.33 billion — RM1.1 billion for construction and RM230 million for manufacturing. On top of that, the property development arm is sitting on unbilled sales of RM73 million.
While the total order book is substantially lower than the RM2.3 billion attained as at end-2013, Sim says it is enough to tide Kimlun over.
In the meantime, he points out that the company’s factories for pre-fabricated concrete products are still “quite full”.
The slowdown in new property launches may be dragging overall construction work but there is still strong demand for affordable housing projects — the mainstay of Kimlun’s construction work.
“We expect to see a bit of a slowdown this year in terms of new orders, but it will pick up again in 2016,” Sim says.
The group’s construction division is working with big property players such as IOI Properties Group Bhd, UEM Sunrise Bhd, United Malayan Land Bhd and Country View Bhd, on projects ranging from serviced and affordable apartments to factories and infrastructure works.
In view of the slowdown, Sim says the group is placing emphasis on improving its profit margins this year. This will be aided by lower material costs, managing labour costs and taking on “simpler” affordable housing projects”.
“There are more jobs around the corner like the MRT line 2, LRT line 3 and Petronas’ Rapid project. But these are still some time off, and will not be awarded so soon,” he says.
The three mega projects could be a big boost to the group’s manufacturing arm, which specialises in prefabricated concrete products, such as the segmental box girders used for the elevated viaducts in Line 1 of the Klang valley MRT that is under construction.
“Theoretically, we should have an edge in the project since we already have the moulds from Line 1. However, that is assuming there isn’t too much variation in the design. Furthermore, the total cost of the moulds isn’t that high. Depending on the size and volume of the orders, the moulds make up less than 5% of cost. In fact, it is less than 3% to 4%,” Sim, explains.
He expects the size of the orders from Line 2 to be smaller.
Kimlun’s share price has been hovering at the RM1.20 to RM1.35 level so far this year. The stock tumbled from its peak of RM2.10 in June 2013 to RM1.30 last Friday despite a steady growth in profit over the past four quarters.
Kenanga has an “outperform” call on Kimlun with a target price of RM1.66, based on a price earnings ratio of 10 times and a net profit estimate of RM46.2 million and RM49.9 million in 2015 and 2016, respectively.
Kenanga’s optimistic view stems from the expectation that there will be more affordable housing jobs in the Southern region. However, AmResearch remains cautious, citing a “macro slowdown in Johor”.
“We maintain ‘hold’ on Kimlun with an unchanged sum-of-parts based fair value of RM1.38 per share. This implies a target PE of 13 times FY15 forecast earnings,” the research house said in its report.
This article first appeared in The Edge Malaysia Weekly, on June 15 - 21, 2015.
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