Kimlun likely to obtain higher-margin construction projects ahead
KUCHING: Kimlun Corporation Bhd (Kimlun) is expected by analysts to obtain higher-margin construction projects ahead while the group also rides on the industrialised building system (IBS) boom in Malaysia and Singapore.
According to RHB Research Institute Sdn Bhd (RHB Research), Kimlun’s strong linkages to the infrastructure boom in Malaysia continued to keep the research house upbeat on the company’s construction unit.
RHB Research noted that among the high-profile projects is the RM1.46 billion Pan Borneo Highway project won by the group’s 30:70 joint venture (JV) with Zecon back in April, as well as other non-residential building and infrastructure jobs.
“Meanwhile, its construction orderbook (as at June 30) stood at RM1.93 billion,” the research house said.
“This will keep the company busy for the next three years.”
It added that Kimlun is also aggressively tendering for various infrastructure projects and lowrise developments, which command higher margins.
RHB Research also noted that the Government’s initiative in pushing for more usage of the IBS, in particular for affordable housing, is set to benefit Kimlun’s concrete manufacturing plants in Johor and Negeri Sembilan.
“Also, the Johor plant is busy meeting escalating concrete demand for the mass rail transit (MRT) and deep tunnel sewerage system projects in Singapore,” the research house said.
“Meanwhile, its RM300 million concrete orderbook comprises a RM200 million order won in March to supply segmented box girders (SBG) for the MRT2 project and the remainder are mainly orders secured from Singapore.
“The management is still awaiting results on the tunnel lining segment’s (TLS) supply contract for MRT2, which will be announced soon.”
As for the property division, the focus is to sell the RM33 million of unsold units at Kimlun’s The Hyve project in Cyberjaya and boutique development with a gross development value (GDV) of RM48 million in Pontian, Johor.
“Meanwhile, management is adopting a wait-and-see approach before deciding on the official launches for the remaining development in Shah Alam, Selangor as well as Medini Iskandar and Kota Tinggi, both in Johor,” it said.
AllianceDBS Research Sdn Bhd (AllianceDBS Research) has opined that Kimlun is a prime example of a stock that underpromises and overdelivers.
Since the start of 2016, the firm said consensus has raised Kimlun’s earnings by 38 per cent for financial year 2016 forecast (FY16F) and 28 per cent for FY17F.
“It is the only stock in our universe which has such a strong positive earnings revision,” the research house said. “This has come from a combination of stronger margins and higher-than-expected contract wins.”
It added that consequently, this has been correlated with the strong performance of Kimlun’s share price, up 69 per cent year to date (YTD).
AllianceDBS Research thus raised its FY16F/17F/18F net profit by 18 per cent/15 per cent/16 per cent to RM77 million, RM86 million and RM94 million respectively.
“This is to factor in higher margins for its construction and manufacturing divisions, balanced off by slightly lower new order win assumptions,” the research house said.
For the first half of 2016 (1H16), construction gross profit (GP) margins were 10.6 per cent versus AllianceDBS Research’s previous FY16F-FY18 forecast of eight per cent per year. As for Kimlun’s manufacturing division, 1H16 GP margins were 33.3 per cent versus the research house’s previous FY16FY18 forecast of 20 per cent.
“We understand 1H16 margins for both construction and manufacturing are not sustainable going forward,” the research house said. This is because for construction some of the better margin works have been completed while the Pan Borneo Highway will involve some heavy upfront costs which will render margins lower in the initial years.
“For its manufacturing division, margins will trend lower as the MRT Line 2 SBG, which is lower margin in nature, has yet to contribute.”