CLOSING at RM2.21 last Wednesday, Kimlun Corp Bhd’s upside potential is 23.5%, if AllianceDBS Research’s RM2.73 target price is to be believed. That is the highest target price among four “buy” calls from seven analysts tracking it. The remaining three say “hold”, with two giving the most bearish valuations at RM2.27 — a level briefly exceeded in early March.
Despite nearly doubling since its multiple-year low of RM1.12 on Aug 21, 2015, Kimlun’s valuation remains cheap. AllianceDBS wrote on March 10: “It stands out as the most direct small-cap proxy for the sector that also boasts an underappreciated manufacturing division.”
The Johor-based construction firm, with a manufacturing arm that makes precast concrete products for industrialised building systems, is sitting on a RM1.9 billion order book. However, 2017 will be an earnings transition year for Kimlun.
“This is because of the timing gap of orders for its Singapore mass rapid transit and deep water sewerage system projects, while its tunnel lining segment contract for the Klang Valley MRT Line 2 may only see delivery towards the later part of 2017,” the research house wrote. “Hence, there may be a build-up in inventory before revenue can be recognised in FY2018.”
That may be why its warrant, Kimlun-WA, has been trading at smaller premiums to the underlying share in recent months. From over 20% premium six months ago, the warrant fetched 8.8% premium last Wednesday and as low as 5.08% the previous week.
Kimlun-WA has a one-to-one conversion ratio, RM1.68 strike price and expires in March 2024.
If Kimlun rises to RM2.73 per share, Kimlun-WA’s theoretical value — assuming zero premium to the mother share — should be RM1.05, 44.8% above its 72.5 sen closing on March 15.
AllianceDBS expects Kimlun to win RM950 million worth of contracts this year and next year and be a strong contender for MRT Line 3 jobs.
Near-term upside may be limited, going by how AmInvestment Bank Research, on March 10, maintained a “buy” call, but cut its fair value from RM2.65 to RM2.40 following Kimlun’s cautious guidance on earnings outlook. Among other things, it would take time to ramp up production to fill new orders.
Yet, Kimlun remains a good proxy for the construction sector, with earnings visibility underpinned by a RM1.67 billion construction and RM260 million manufacturing order backlog.
Kimlun-WA would only be worth 72 sen at parity to Kimlun at RM2.40. But if it is only a matter of time before earnings bounce back, the stock and warrant would be worth another look.
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