Set to be listed on Monday, Kim Lun will be the first construction listing in more than 3 years. Its client base mainly comprises listed property developers. We like Kim Lun’s exposure to the Iskandar region and utilization of the IBS concept, which enhances efficiency. We also see strong potential for its concrete division in the Singapore market. Our RM1.27 TP for Kim Lun is based on 8x FY10 earnings.
Decent track record. Kim Lun has played the role of both main and subcontractor for many local listed companies, including property developers and contractors. It currently has an orderbook balance of RM650m. Management is guiding for RM653m worth of tenders in the pipeline with a historical success rate of 30%. We are assuming RM300m in new annual job wins, 52% of which has been met YTD.
IBS contractor. Kim Lun implements the IBS concept in its construction works, which is more efficient than traditional construction. With IBS, Kim Lun is able to apply both the “precast” and “system of form” methods while most contractors only utilise the latter. The precast method is less labour intensive, more time efficient and results in higher quality. Given the Government’s attempts to reduce Malaysia’s dependence on foreign labour, we believe contractors that utilise the precast method are highly sought after.
Iskandar play. We believe that Kim Lun is poised to benefit from the developments at Iskandar given that it is based in Johor and its track record in the state. Traditionally, some jobs at Iskandar were only awarded to Johor-based contractors. Iskandar Investment is expected to call for RM2bn worth of construction tenders within Iskandar this year, some of which include various education institutions, 1Medini Residence, government buildings, Chelsea Mall and Legoland Theme Park.
Concrete products. This division makes up 10%-15% of revenue and has an outstanding orderbook of RM82m. Part of the IPO proceeds will be used for the division’s capacity expansion, which we have not imputed into our earnings. We also see strong potential for higher sales in Singapore, particularly the tunnel lining segments of the MRT and precast concrete structures for HDB flats.
Fair value of RM1.27. We have an earnings growth projection of 15% and 11.2% for FY10 and FY11 respectively, translating into forward PER multiples of 6.1x and 5.5x. Small cap contractors currently trade at 9.2x CY10 earnings. We are applying an 8x earningsmultiplier to Kim Lun’s FY10 earnings to derive a target of RM1.27. Management has guided for a 30% payout ratio, implying forward yields of 4.9%-5.4%.
IPO DETAILS
First construction listing after 3 years. Kim Lun Corporation (“Kim Lun”) will be listing on the Main Market of Bursa next Monday. Based on its enlarged share capital of 229m and IPO price of RM0.97 per share, Kim Lun will have a market capitalisation of RM222.1m. It will be the first construction IPO in more than 3 years, the last being Melati Ehsan (NR) in March 2007.
The listing involves an Initial Public Offering comprising: • Public issue of 64m new shares which will be allocated as follows: (i) 11.45m to the Malaysian public via balloting, (ii) 1.5m to employees and business associates, (iii) 33.05m to selected investors via placement, and (iv) 18m to Bumiputera investors via placement. • Offer for sale of 11.3m shares comprising (i) 0.38m to eligible directors, (ii) 5.46m to selected investors via placement, and (iii) 5.46m to Bumiputera investors also via placement. We understand that the placement portion for selected investors which are mainly private and public
sector funds has been completed. Utilisation of gross proceeds. Based on the issuance of 64m new shares, the total gross proceeds raised from the IPO would amount to RM62.1m. The proposed utilisation of proceeds is shown in Figure 1, all of which should take place within 24 months.
BACKGROUND
Construction play. Based in Johor state, Kim Lun is primarily involved in construction and the manufacture of concrete products. As such, the company’s operations are closely tied to the domestic construction scene. Between FY07-09, construction made up 87%-90% of Kim Lun’s topline. We project this to remain relatively unchanged for the next 2 years. The company comprises three wholly-owned subsidiaries as shown below.
A short history lesson. Founded in 1977 in Johor Bahru, KLSB is primarily involved in the construction of buildings and infrastructure. Until 2002, most of KLSB’s projects were mainly smallish in nature, with value of less than RM20m. Since 2003, KLSB had managed to scale up and secure jobs worth more than RM100m. Based on its CIDB licence, there are no limitations to the contract value that KLSB can carry out. Kim Lun’s second subsidiary, SPC, commenced operation in 2002 when it acquired Sri Pulai Granite Quarry SB for RM3.8m cash. SPC is mainly involved in the manufacture of ready mixed concrete (RMC) and precast concrete products. Contributions from its third subsidiary, IBT, remains insignificant at this juncture.
Management team. Kim Lun is spearheaded by its Chairman Mr Pang Tin @ Pang Yon Tin, who has more than 40 years of experience in the construction industry. He is also a substantial shareholder in property developer, Aims Holdings (NR). Another key personnel in Kim Lun is its CEO, Mr Sim Tian Liang. He holds a Bachelor of Engineering degree and has been in construction for over 30 years. He also serves on various construction related associations and bodies. Post IPO, Mr Pang Tin and Mr Sim will have a 40.4% and 2.9% stakes in Kim Lun.
INEVSTMENT THESIS
Good track record. From FY06-09, Kim Lun managed to complete construction works worth RM1.32bn. While most of these works are centred in Johor, Kim Lun also has a track record in other parts of Malaysia. Some of its key clients include property developers such as SP Setia (TAKE PROFIT, TP: RM3.59), Mah Sing (NR), UM Land (NR), UEM Land (NR) and Keck Seng (NR). Aside that, Kim Lun has also been subcontractor to contractors such as WCT (NEUTRAL, TP: RM2.74) and Melati Ehsan. A sample of Kim Lun’s completed projects is shown in the Appendix.
Decent orderbook size. As of end-April, Kim Lun’s construction orderbook stood at RM650m, which we expect to last the company for the next 2 years. For FY09-10, we are assuming RM300m in new annual job wins, which we feel is conservative. YTD, the company has managed to meet 52% of our FY09 orderbook replenishment assumption by securing 3 jobs worth RM156m. Based on our analysis of its orderbook balance and burn rate, we estimate that Kim Lun managed to secure RM500-550m in new jobs annually for the past 2 years. Management indicates that it has RM654m worth of tenders in the pipeline and has a historical success rate of ~30%. The pipeline tenders comprise 65% private sector jobs and 35% Government. About 90% of these jobs are building related.
Industrial Building System (IBS). In 2008, Kim Lun set up an IBS department to facilitate the execution of projects based on the IBS concept. Before we dwell further on this, it would be useful to differentiate between traditional construction techniques and the IBS concept. As illustration, consider the construction of an office lot. Under traditional construction, the building is constructed as a whole on site “layer-by-layer”. By contrast, under IBS, the various building components (e.g walls) are manufactured first and then assembled to make up the building (think of a Lego set!). Given the difference, it is clear that the IBS method requires less manpower. Construction time using IBS is also
shortened by 40%-50% vis-à-vis the traditional method.
Implementing the IBS concept. There are two systems in IBS namely: (i) the “system of form” method which involves building components being fabricated on site, and (ii) the “precast method” in which the building’s components are fabricated off site in mass production. In the construction process, Kim Lun is able to utilise both methods. Management guides that most contractors tend to only utilise the form method. We understand that the precast method has advantages such as (i) better quality control, (ii) less labour intensive, (iii) reduction in construction duration, and (iv) less affected by adverse weather conditions as the fabrication is done off-site. By being able to fabricate its own precast concrete products, Kim Lun is better able to implement the precast method.
Government supports the use of precast. We gather that the Government encourages the precast method in the implementation of public sector jobs. Traditionally, most workers on construction sites tend to be foreigners. Given the increasing push to reduce dependence on foreign labour, contractors who are able to implement the precast method should benefit as it is less labour intensive. Malaysia intends to reduce foreign workers by 15% in 2010.
Poised to benefit from Iskandar. As Kim Lun is based in Johor and given its strong track record there, we believe it is poised to benefit from the developments at Iskandar Malaysia (“Iskandar”). In the past, some of the projects in Iskandar were only open for tender by Johor based contractors. Iskandar Investment is expected to call for RM2bn worth of construction tenders this year comprising buildings and residential projects. Other key developments within Iskandar include: • Marlborough College, Newcastle University of Medicine and Sri KDU Smart School• 1 Medini residence by WCT (Kim Lun could get a subcontracting role)• Six buildings of RM1bn to house federal departments and agencies in Kota Iskandar• Chelsea high end shopping mall by Genting Malaysia (BUY, TP: RM3.15)• Legoland Theme Park (RM700m) in which some tenders have been called
Solid as concrete. Kim Lun’s concrete division made up 10%-15% of group revenue over the past three years. As of end April, this division has an orderbook balance of RM82m. Some of its notable sales thus far include manufacturing precast bathrooms for the hotels at Resorts World Sentosa, precast building elements for the Intel factory in Singapore and concrete cladding pipes for JAKS (NR). Some pictures of Kim Lun’s concrete products are shown in the Appendix.
Expansion plans. Kim Lun will utilise RM26.5m (42.7%) of the gross proceeds raised to expand its concrete product division. It intends to build a new factory for tunnel lining segments at its current premises in Ulu Choh, Johor. Aside that, it also plans to set up factories to fabricate spun piles, hollow core slabs and lightweight concrete wall panels. The expansion plans could provide an upside to our earnings projection as they have yet to be factored in.
Potential in Singapore. Most of Kim Lun’s concrete products are sold in Singapore where we continue to see strong potential. Kim Lun has been supplying precast concrete tunnel lining segments for the Mass Rapid Transit (MRT) tunnels in Singapore. In its current orderbook, there is another SGD13m worth of orders for the MRT tunnels. There are plans to expand Singapore’s MRT network from 138.2km as of end-2008 to 278km by 2020, which should bode well for Kim Lun’s new sales orders. The Singapore government also intends to build over 12,000 units of Housing Development Board (HDB) flats within the next year and has mandated the use of precast concrete structures. Kim Lun should benefit from this given the close proximity of its plants to Singapore.
VALUATION & RECOMMENDATION
Fair value of RM1.27. We project a 15% earnings growth for FY10 and 11.2% for FY11. The key assumptions underlying our earnings forecast are: (i) RM300m in annual orderbook replenishment and (ii) gross construction margins of 12%-13%. The upside to our earnings projection would be driven by stronger than expected job wins and contributions from the expansion of its concrete products division. Based on consensus estimates, small cap contractors currently trade at an average CY10 PER of 9.2x. Given its newly listed status, we are applying a lower earnings multiplier of 8x to its FY10 earnings to derive a TP of RM1.27, providing an upside of 30.6%. Based on management’s guidance of a 30% dividend payout, we project yields of 4.9%-5.4% for FY10-11. As Kim Lun is not within our regular research coverage, we have a NOT RATED call on the stock.
1 comments:
too bad didnt bought this. Now always 100% gain compare IPO price.