KIM LUN - Transforming

Kimlun is a Johor based construction company listed in Bursa Malaysia on 25 Jun 2010. The business of Kimlun consist of 3 main segment: Construction, Manufacturing & Property Development. Brief History: Started as construction company in 1970s, the company focus was primary the main or subcontractor for other reputable developers as well as civil works for public amenities in Malaysia. It also manufacture precast concrete products via its wholly subsidiary SPC Industries Sdn Bhd. since 2002. Subsequently in year 2011, the company had diversified into property development itself to build and sell property projects in Iskandar Malaysia.  Based on announcement in year 2012, Kimlun received its first Segment Box Girder project worth RM 223 million from MRT Corporation Malaysia for the MRT project from Sungai Buloh to Kajang. However, Kimlun has long established it expertise in supplying precast concrete products, mainly precast tunnel linings, and precast pipes, to Singapore LTA and PUB back in 2005. For the past 3 years, i didn't pay much attention to this company simply due to its high debt level. I remember my sifu has used kimlun as one of example when trying to explain Dupont's ROE to us. When the property sector within Iskandar Malaysia region showed sign of slow down since 2014, this stock was basically "frozen" in the fridge. Key Financial Highlight (1): Income Statement Recently having meeting with one of my friend familiar with the industry, i started to look at Kim Lun. I didn't buy into it until the announcement of Q4' 2015 result. Below key financial figures for Kimlun from 2012 to 2015: Kimlun NOPAT was rather flat from year 2012 to 2015. However, it achieved a total of RM 70.7 million for FY 15, this is 58% higher than what it achieved in FY 2014. According to the management, the better result was due to better margin for both manufacturing and construction projects. I tried to break the segment report for past 8 quarters into individual item and i noticed the margin of both construction and manufacturing segment are indeed much much better compared to before. Important Observation: 1) The margin for construction has grown from 6.42% to 9.3%. 2) The margin for manufacturing has grown more than double from 14.4% to 33.8%. I believe this is due to better economy of scale. 3) The income contribution from precast product has surpassed construction segment for the 1st time. I see this as a good move. According to local report, Kimlun is one of the 2 major supplier of precast SBG and TLS in Malaysia. I believe this give them a special niche and such specialty enable them to enjoy better product margin compared to highly competitive construction segment. Financial Highlight (2): Balance Sheet and Cash Flow Statement Important Observation: 1) Improving cash level, asset, EBIT 2) Noted CAPEX was pretty big in 2012 Key Analysis: Key Ratio: Important Observation: (1) Kim Lun is improving its balance sheet. Financial Leverage was a concern last time, but it is improving. I hope it will improve further. (2) Interest coverage of 11 times. (3) + FCF is noticed for 2 consecutive years. (4) Not a class A balance sheet but not that bad i guess. Valuation: At current share price of RM 1.81, Kimlun is certainly not an expensive pick based on it current order book of RM 1.4 billion (inclusive of recent win on Pan Borneo Highway).  Below i extracted from 2 Research Report. Kim Lun is focus a lot into infra works.  Hong Leong: Highlights Pan Borneo award... Yesterday, we attended Kimlun’s investor’s briefing which was represented by its CEO, Mr Sim Tian Liang and CFO, Ms Vennessa Yam. Subsequently, it was announced that the 70:30 JV between Zecon (not - rated) and Kimlun was awarded a package of the Pan Borneo Highway (PBH) from the Serian roundabout to Pantu Junction worth RM1.46bn (Kimlun’s share: RM438m). ...providing the boost. This contract significantly boosts Kimlun’s orderbook by 47% to RM1.4bn, implying a cover ratio of 1.6x on FY15 construction revenue. Job wins have been strong YTD at RM711m, almost matching FY15 full year sum of RM750m. Management is targeting another RM300-500m in new job wins for the remainder of FY16. Countering the slowdown. Management highlights that the slowdown at Iskandar has impacted high rise buildings the hardest. To counter this, Kimlun is tapping on other segments such as affordable housing, factories and industrial buildings. This appears to be paying off with RM270m worth of building related jobs secured YTD. Hitting harder on infra. Kimlun has also started to tender more aggressively within the infra space, evidenced by its recent win of the PBH package. It has submitted its bid for the Central Spine Road (RM8bn) both as a main and subcontractor. Apart from that, it has also been invited by Prolintas to bid for the 8 work packages involving the DASH (RM4.2bn) and SUKE (RM4.3bn) highways. These highway packages have been excluded from management’s new jobs win target. Prequalified for MRT2. Kimlun has submitted its bid to supply segmental box girders (SBG) for the MRT2 while tenders for the tunnel lining segments (TLS) have yet to be called. For MRT1, Kimlun managed to secure 50% of the SBG (RM223m) and TLS (RM48m) requirements. We expect this to be no different for MRT2 as Kimlun’s plant in Senawang is strategically located for logistical reasons and has sufficient capacity. Kenanga: Outlook As of FY15, its outstanding orderbook for construction and manufacturing stands at RM0.94b and RM0.17b, respectively. That said, their JV venture has unbilled sales of RM11.0m from the HYVE project, providing a visibility of 1 – 1.5 year. Outlook remains bright as more upcoming jobs are expected from: (i) governmental affordable housing jobs whereby >70% of IBS components compliance are requirements for these jobs, (ii) railway's material supply jobs, i.e. SBG and TLS to KVMRT2/LRT3, and (iii) Singapore MRT line extension and other sewerage projects. Our replenishment target for FY16 stands at RM700m which we deem achievable considering that KIMLUN has achieved slightly >RM600m in FY15. Based on above 2 research house, the news on KVMRT2/LRT 3 has been the key focus on most research house.  However, I'm also very keen to look into Singapore Projects. Below tables shows some of the past project won by Kim Lun. Majority of its were from Singapore Government Sectors. In fact, Kim Lun "repeatedly" win projects from Singapore. There is one part which hardly touch by research house is the DTSS phase II project which Kim Lun has involved in Phase I.  In 2014 annual report, Kim Lun has touched on the outlook of project in Singapore.  Based on above, i did a search to Singapore LTA and PUB website for the latest info. I see tremendous opportunity for Kim Lun especially:  (1) Cross Island Line  (http://www.lta.gov.sg/content/ltaweb/en/public-transport/projects/cross-island-line.html) This is a massive project which Environmental Impact Assessment (EIA) has completed the environment impact study. Spanning Singapore, the Cross Island Line (CRL) will be about 50km in length and is targeted to complete around 2030. Basically, either route chosen, the project will be massive. i) Direct alignment - 2km tunnel below the CCNR - Approximately 40m deep - No physical structure on the surface level ii) Skirting alignment - 9km under homes and businesses - Supporting ventilation facilities on the surface level (2) Deep Tunnel Sewerage System Phase II, 2016 (DTSS II) http://www.pub.gov.sg/dtss/Pages/default.aspx DTSS Phase 2 comprises: - A 30km long South Tunne - 70km of link sewers to cover the western part of Singapore, including the downtown area and major upcoming developments such as Tengah Town What Else? Kim Lun's wholly owned subsidiary KL Building Materials S/B has recently acquired 51% of Rock Projects S/B. The company has entered into agreement with koperasi Pena: "RPSB had on 3 September 2015 entered into a Quarry Operation Agreement (“QOA”) with Koperasi Pena (“Koperasi”), which has secured the conditional approval from Jabatan Perhutanan Negeri Johor on quarry extraction on part of Kompartmen 16, Gunung Pulai Forest Reserve measuring 50 acres (“Land”) (“the Approval”), on 17 February 2015. The conditions imposed in the Approval include: (i) the obtainment of the Minor Licence (“ML”) and Use Permit (“UP”) required for the implementation of the scope of works under the QOA, under the National Forestry Act 1984 Johor (“NFA”); (ii) compliance with all conditions to be imposed in the UP; (iii) the obtainment of the approval of Environment Impact Assessment (“EIA Approval”); and (iv) Replanting of the Land" The profit that generated from above 50 acres (is pretty huge) above project, 65% will goes to Rock Project, 35% will goes to Koperasi Pena. From the 65%, KimLun will be getting 51%.  This will become another source of income for Kim Lun on top of current Sri Pulai Quarry.  The 50 acres should be sufficient to supply to Kim Lun for the next many year's project Conclusion: I like Kim Lun due to: (1) Improving balance sheet (2) Order book at RM 1.4 billion which give earning visibility of 1 year to 2 (3) Aggressively tendering the infra project both in Malaysia and Singapore. (4) Improving margin for the project. (5) Manufacturing with better margin now play equal role. (6) Valuation is certainly not expensive.