This article first appeared in The Edge Malaysia Weekly on April 8, 2024 - April 14, 2024

THE financial results and share price performance of Kimlun Corp Bhd had not been impressive in recent years. The Johor-based construction company, which also manufactures precast concrete, saw its earnings shrink for six consecutive years after it achieved a record net profit of RM81.92 million in the financial year ended Dec 31, 2016 (FY2016). It even bled red ink in FY2021 and FY2022, with a net loss of RM590,000 and RM7.23 million respectively.

The group, however, returned to the black in FY2023 with a net profit of RM7.06 million (see chart), partly due to the higher revenue as a result of the acceleration in construction progress on the Sarawak-Sabah Link Road project.

As at end-2023, Kimlun’s construction order book stood at RM1.9 billion while its manufacturing order book amounted to RM300 million, giving the group a total order book of RM2.2 billion. This is expected to provide the company with earnings visibility for the next two to three years.

Given the sizeable order book in hand, Kimlun CEO and executive director Sim Tian Liang is optimistic that the company will regain lost ground as it is working hard to secure new jobs in Sarawak and Johor.

“In 2024, we expect some tender opportunities from the public sector, which include some road upgrading works in Johor, the Kuching Urban Transportation System (KUTS), Klang Valley Mass Rapid Transit Line 3 (MRT3), as well as some affordable housing and flood mitigation projects,” Sim tells The Edge in an interview.

The construction and engineering services division remains the company’s bread and butter, contributing close to 75% to its turnover in FY2023. Meanwhile, the manufacturing and trading division made up 22% of the group’s top line, while its property division accounted for the rest.

Kimlun had in 2012 bagged contracts worth RM271.7 million to supply segmental box girder (SBG) and tunnel lining segment (TLS) for the first MRT line (MRT1) in Malaysia. Four years later, it clinched contracts worth RM252.7 million to supply SBG and TLS for the MRT2 project.

Notably, Kimlun also supplied SBG, precast concrete sleepers, precast concrete TLS, industrial building system (IBS) components and other precast components to Singapore’s MRT projects.

Kimlun executive director Vennessa Yam Tai Fong tells The Edge in the same interview that in 2016, the company’s 30%-owned joint-venture firm Zecon Kimlun Consortium Sdn Bhd was awarded the RM1.46 billion work package contract for the Pan Borneo Highway in Sarawak.

The project marked Kimlun’s geographical diversification into East Malaysia as well as the expansion of its construction services to include highway projects. About five years later, the group won the contract to participate in the Sarawak-Sabah Link Road project.

“In other words, we have established our track record in East Malaysia, especially Sarawak. Going forward, we will be eyeing more opportunities there, including KUTS, Phase 2 of the Sarawak-Sabah Link Road and the Northern Sarawak Coastal Highway,” says Yam.

Currently, Kimlun’s largest ongoing job is the construction and maintenance of the Sarawak-Sabah Link Road, specifically the Lawas-Long Lopeng Junction segment, under a RM780 million contract awarded by Samling Resources Sdn Bhd in 2021.

Other projects and sales orders include contracts secured from Eco World Development Group Bhd, UEM Sunrise Bhd, S P Setia Bhd and China Communications Construction Co Ltd.

Yam acknowledges that the property and construction industries had been slowing down for many years. But she sees the nascent signs of recovery.

“If you look at Johor, which is our home base, the developers are upbeat with improvement in the property market sentiment given the visibility of the Johor Bahru-Singapore Rapid Transit System (RTS) Link project as well as the announcements of the proposed Johor-Singapore Special Economic Zone and Special Financial Zone,” says the 56-year-old, who has a direct stake of 2.78% in the company.

Yam adds that these developments will help drive construction activities, especially in Johor.

As for its property development operation, Kimlun has two ongoing projects, namely Hundred Trees Private Estate — comprising 60 units of freehold semi-detached houses in Bandar Seri Alam, Johor — and Phase 2 of Bukit Bayu in Shah Alam, Selangor, which consists of 16 units of leasehold bungalows.

These two developments, which carry a collective gross development value (GDV) of RM114 million, are expected to contribute to Kimlun’s earnings in the coming years.

“We hope to launch one serviced apartment project in Johor Bahru comprising 896 units, with an estimated GDV of about RM300 million, in the second half of this year,” says 69-year-old Sim, who has an equity interest of 2.6% in the company.

Kimlun’s single largest shareholder is its executive chairman Pang Tin, who owns a 37.3% indirect stake, held through Phin Sdn Bhd, as well as a direct stake of 5.4%.

Including the equity interest held by his wife Wang Ah Yu and his children — Sunny Pang Yi Lin, Pang Yi Shia and Pang Yili — it is estimated that 76-year-old Tin controls a 46.29% stake in Kimlun.

Meanwhile, his son Khang Hau, who sits on the board as executive director, is the second largest shareholder with a direct stake of 6% in the company.

Kimlun’s top 30 largest shareholders include Dana Makmur Pheim — helmed by fund manager Dr Tan Chong Koay — and Etiqa Family Takaful Bhd (Dana Ekuiti).

Exposure to Singapore MRT

Singapore is the main market for Kimlun’s precast concrete products. In fact, the city state made up 99% of Kimlun’s newly secured manufacturing sales orders in 2022 and 2023. The company mainly supplies to Singapore’s MRT projects.

Nevertheless, Sim says Kimlun is not limiting itself to only serving the Singapore market, as the group foresees similar opportunities in Malaysia in the future. For instance, the Penang Light Rail Transit (LRT) project, the MRT3 project and KUTS, as well as other railway-related projects.

“Together with our local partner, we have submitted our bid to participate in the KUTS project as a supplier of precast components. From what we have gathered so far, there are at least three bidders at the moment.

“If you ask me, we are quite confident because not only do we have the track record in Sarawak, but also the precast concrete business. We hope for a favourable outcome in the next three to four months,” says Sim.

KUTS’ initial phase encompasses the Kuching Autonomous Rapid Transit (ART) project, which spans about 70km, includes three lines and is fully funded by the Sarawak government at an estimated cost of RM6 billion.

Sarawak Metro Sdn Bhd, a wholly-owned subsidiary of Sarawak Economic Development Corp, is the implementer of KUTS, which serves as the backbone system to alleviate traffic congestion towards Kuching city centre.

Meanwhile, Kimlun is also keen to participate in highway expansion and upgrading projects, namely the PLUS North-South Expressway (Senai Utara-Sedenak segment) and Senai-Desaru Expressway, says Yam.

“Ideally, we hope to be appointed as the main contractor. Obviously, many construction companies will be eyeing these two jobs, but we will try our best,” she adds.

Back on the radar

News of more public transport jobs and the increase in property launches have helped to fuel interest in construction stocks. The positive sentiment appears to have spilled over to Kimlun, whose share price has gained 32%, or 25 sen, year to date to close at RM1.03 last Thursday, giving the company a market capitalisation of RM363.98 million.

The counter is currently trading at a historical price-earnings ratio (PER) of 51 times based on earnings per share of two sen in FY2023.

In a March 21 research note, AmInvestment Bank maintained a “buy” call on Kimlun with a higher fair value of RM1.20, based on the FY2024 PER of nine times.

Given the bright prospects across all its business divisions — construction and engineering services, manufacturing and trading, and property development — the research house predicts that Kimlun would report a net profit of RM47.2 million in FY2024, followed by higher net profits of RM57.5 million in FY2025 and RM122.3 million in FY2026.

“We believe Kimlun is undervalued, currently trading at a FY2024 PER of 7.3 times — a 19% discount to the average PER of nine times for small-cap construction stocks in Malaysia,” the AmInvestment Bank research team wrote.

However, Hong Leong Investment Bank (HLIB) and Kenanga Research are less optimistic in terms of earnings forecasts.

HLIB anticipates that Kimlun would post a net profit of RM40 million in FY2024 and RM44.7 million in FY2025, while Kenanga Research forecasts a net profit of RM29.2 million in FY2024 and RM31.5 million in FY2025.

Kimlun has been able to achieve an unbroken dividend payout track record since its listing in 2010, with an average payout ratio of 26.1%. However, the company’s dividend per share (DPS) has been on a decline because of earnings contraction. From 3.3 sen in FY2019, the DPS dropped to one sen over the subsequent four years (FY2020-FY2023).

As at Dec 31 last year, Kimlun’s net debt stood at RM349.97 million, representing a net gearing ratio of 0.47 times. Its total borrowings were at RM413.33 million, of which RM217.4 million was current liabilities, while its cash balance was at RM63.4 million.

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