Results Highlights

Kimlun’s 2Q2016 net profit climbed 54.8% Y.o.Y to RM24.1 mln, mainly due to the improvements in its construction and manufacturing & trading segments. Revenue for the quarter, however, fell 4.7% Y.o.Y to RM246.4 mln due to lower balance of construction work carried forward from the previous year.

For 1H2016, cumulative net profit gained 38.8% Y.o.Y to RM41.2 mln. Revenue for the period, however, contracted 17.1% Y.o.Y to RM481.2 mln. The reported earnings came in above our expectations, accounting to 61.8% of our previous full year estimated net profit of RM66.7 mln. Meanwhile, the reported revenue came within expectation, accounting to 48.9% of our full year revenue forecast of RM984.2 mln.

Albeit the contraction in its topline, the group’s construction division’s gross profit rose 6.7% Y.o.Y to 39.3 mln in 1H2016 due to billings from higher margin projects executed, coupled with lower raw material and fuel prices. The manufacturing and trading segment’s gross profit jumped 60.7% Y.o.Y to RM36.1 mln as 16% of the total revenue from the previous corresponding period came from KV MRT1 segmental girder box (SGB) orders that yields lower margins. The group’s property development gross profit gained 24.7% Y.o.Y to RM0.2 mln.

We note that the group’s gearing has been pared down to 28.3% in 1H2016, from a high of 70.2% recorded in 2013 – underlining the management’s prudence in maintaining a healthy balance sheet.

Prospects

Kimlun’s outstanding construction orderbook of approximately RM1.93 bln as at 30th June 2016 (implying cover ratio at 2.3x its 2015’s construction revenue), will underpin its segment earnings until 2020. Including the notable Pan Borneo Highway project, Kimlun has secured approximately RM975.4 mln worth of new construction projects YTD, accounting to 88.7% of our targeted orderbook replenishment rate of RM1.10 bln for the year. We are positive that the orderbook replenishment rate is achievable, backed by its RM3.0 bln tenderbook, mainly for mega-infrastructure road projects.

Elsewhere, its outstanding manufacturing orderbook of approximately RM300.0 mln will also help to sustain the segment earnings over the next 18 months. In 2H2016, Kimlun will be banking on the tunnel lining segment (TLS) orders for the Klang Valley MRT Line 2 (KVMRT2) and we also note that the group has been pre-qualified for LRT3 packages.

The group’s property development unbilled sales of RM6.7 mln from its maiden property project, The Hyve, will be recognised progressively over the next 12 months. The Hyve has achieved a take-up rate of 83.0% since launching at end-2012. Going forward, Kimlun targets to launch Phase 1 of the Opus Medini Iskandar project in 2H2016 (originally in 4Q2015) which carries a GDV of approximately RM420.0 mln, subject to the state of the general property market.

Valuation and Recommendation

As the reported earnings topped our forecast, we raised our earnings forecast by 13.2% and 10.0% to RM75.5 mln and RM82.5 mln in 2016 and 2017 respectively to reflect the stronger execution of better margin projects secured over the past year in the construction segment, while the manufacturing segment’s growth will be boosted by a better product mix and favourable currency exchange rates from its Singapore projects.

We reiterate our BUY recommendation on Kimlun with a higher target price of RM2.35 (from RM2.20). Our target price is derived from ascribing an unchanged target PER of 11.0x to its revised 2016 construction earnings and PER of 6.0x to its revised manufacturing earnings, while its property development segment’s valuation remain unchanged at 0.6x its BV due to its relatively small-scale development projects.

Risks to our recommendation include failure to meet the targeted construction and manufacturing orderbook replenishment rate. Failure to secure manufacturing sales order of at least RM300.0 mln in 2016 will see a slowdown in the group’s manufacturing earnings. Further tightening of credit facilities and lower household disposable income could translate to a decline in purchasing power for its property launches going forward.

Source: M+ Online Research - 30 Aug 2016