Grey skies ahead for Kimlun on weak construction outlook
KUCHING: With an overall weakened prospect in our local construction sector, it looks like it will be grey skies ahead for Kimlun Corporation Bhd as several of the mega rail projects they have been gunning for have either been terminated or under review.
In a recent results note, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) detailed that Kimlun had previously been vying for either construction packages or precast supply packages from the now terminated MRT3 project, the terminated KL-Singapore High Speed Rail (HSR) project and the East Coast Rail Link (ECRL) that is currently under review.
While the termination of these projects will not affect Kimlun’s current orderbooks as they have yet to receive packages from them, MIDF Research guided that the shrinking number of major infrastructure jobs will be unfavorable to all construction players in the longer term as competition heightens within the sector.
With the new government reviewing more mega infrastructure projects on the grounds of fiscal prudence, it is expected that more projects could potentially be deferred, scaled down or cancelled.
Adding to this, AmInvestment Bank Bhd (AmInvestment Bank) believes that the introduction of a more transparent public procurement system to plug leakages will translate to lower margins for all construction players moving forward.
“In view of this, we reduce our FY18- 19E construction replenishment target for Kimlun to RM700 million from RM1.0 billion, and FY18- 19E manufacturing replenishment target to RM120 to 150 million from RM300 million,” said Kenanga Research.
Conversely, AmInvestment Bank maintained its current forecasts for the local construction player as Kimlun’s current construction and manufacturing order backlogs of RM1.58 billion and RM360 million respectively will provide at least 1 to 2 years of earnings visibility.
With a more challenging construction sector in view, both Am Investment Bank and Kenanga Research have downgraded their respective calls and target prices on Kimlun.
Am Investment Bank downgraded its call on Kimlun to ‘hold’ with a 32 per cent reduce fair value of RM1.81 to reflect a reduce benchmark forward target PE of 7 to 9-fold for small-cap constructions stocks.
Meanwhile, Kenanga Research downgrades their call on the stock to ‘Market Perform’ with a lowered target price of RM1.80 after rolling forward their valuation base year to FY19E ona. Reduce target PER of 8.0-fold form 10-fold.
Starting out the year with a lackluster first quarter (1Q18), Kimlun’s 1Q18 net profit ended up only hitting16 per cent of the market’s full-year forecasts.
Despite this, Am Investment Bank still considers the results to be within expectation as the quarter under review was affected by a slow delivery for pre-cast concrete segments to the MRT2 project.
“This was due to a temporary stop- work order following a mishap on the site, resulting in poor overhead absorption that hurt margins. 1QFY18 net profit declines year over year (y-o-y) for the same reason,” said the bank.
Moving forward however, Am Investment Bank expected delivery to pick up over the remaining quarters of FY18.