Results Highlights

• Kimlun’s 3Q2016 net profit fell 15.8% Y.o.Y to RM16.5 mln, mainly due to higher operational cost coupled with lower contributions from its share of profits from joint ventures. Revenue for the quarter declined 7.0% Y.o.Y to RM224.2 mln due to lower contribution from the construction segment that saw lower balance orders carried forward which offsets the growth in other segments.

• For 9M2016, cumulative net profit climbed 17.1% Y.o.Y to RM57.7 mln. Revenue for the period, however, slipped 14.2% Y.o.Y to RM705.3 mln. Despite the weaker 3Q2016 performance, the cumulative earnings come in slightly above our expectations, accounting to 79.5% of our full year estimated net profit of RM72.6 mln. However, the reported revenue was below expectation, accounting to 71.7% of our full year revenue forecast of RM984.2 mln.

• Albeit the contraction in its topline, the group’s gross profit for 9M2016 gained 20.9% Y.o.Y to RM106.9 mln, mainly due to: (i) work billings from higher margin construction projects, (ii) lower raw material prices, and (iii) lower fuel prices for transportation costs, particularly to Singapore.

• We note that the group’s gearing has been pared down to 13.8% in 3Q2016, down from 28.3% recorded in 2Q2016 – underlining the management’s prudence in maintaining a healthy balance sheet

Prospects

Although Kimlun did not secure any major construction contracts in 3Q2016, the group’s achievement earlier in 1H2016, having bagged RM975.4 mln worth of construction contracts, already accounts to 88.7% of our targeted orderbook replenishment of RM1.10 bln for 2016. In the meantime, Kimlun is tendering for some RM3.0 bln worth of construction contracts, mainly for mega-infrastructure road projects, coupled with affordable housing projects. Going forward, Kimlun’s outstanding orderbook of RM1.78 bln as at 30th September 2016 (construction orderbook cover ratio of 2.1x of 2015’s segment earnings) will provide earnings visibility until 2020.

Over at the manufacturing segment, the group recent win for the supply and delivery of precast concrete tunnel segment linings to the Mass Rapid Transit 2 (MRT2) project worth RM52.8 mln has boosted its outstanding orderbook to approximately RM330.0 mln that will sustain its segment earnings over the next 2-3 years.

Elsewhere, the tender for the design and construction of sewer tunnels for deep tunnel sewerage system in Singapore has been called in October 2016 and is expected to be awarded in 2017. Elsewhere, the group’s property development unbilled sales of approximately RM5.0 mln from its maiden property project, The Hyve, will be recognised progressively towards early 2017. Going forward, there are no plans for future launches, owing to the subdue property market.

Valuation and Recommendation

Despite the reported earnings topping our forecast, we made no changes to both our 2016 and 2017 earnings forecast as the majority of its construction projects are still at their initial stages of construction, whereby the upcoming quarter’s results would be flattish and earnings will only ramp-up from 2017 onwards.

Hence, we reiterate our BUY recommendation on Kimlun with an unchanged target price of RM2.35. Our target price is derived from ascribing an unchanged target PER of 11.0x to its 2017 construction earnings and PER of 6.0x to its 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 RM250.0 mln in 2017 could 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: Mplus Research - 30 Nov 2016