Results Highlights

• Kimlun’s 4Q2016 net profit expanded 13.0% Y.o.Y to RM21.2 mln, mainly due to execution of higher margin projects, lower raw materials and fuel prices. Revenue for the rose marginally by 1.5% Y.o.Y to RM235.4 mln.

• For 2016, cumulative net profit added 15.9% Y.o.Y to RM81.9 mln. Revenue for the year, however, contracted 10.7% Y.o.Y to RM940.7 mln. The reported earnings came above our expectations, accounting to 112.9% of our full year estimated net profit of RM72.6 mln. Meanwhile, the reported revenue came within expectation, accounting to 95.6% of our full year revenue forecast of RM984.2 mln.

• Despite the contraction in its topline, the group’s gross profit for 2016 gained 22.5% Y.o.Y to RM150.6 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. This translates to a gross profit margin of 16.0% vs. 11.7% recorded in 2015.

• We note that the group’s net gearing has been pared down to 6.7% in 4Q2016, down from 13.4% recorded in 3Q2016 – underlining the management’s prudence in maintaining a healthy balance sheet. Kimlun has also proposed a final dividend of 6.5 sen per share.

Prospects

Although Kimlun did not secure any major construction contracts in 2H2016, the group’s achievement earlier in 1H2016 - having bagged RM990.4 mln worth of major construction contracts, already accounted to 90.0% of our targeted orderbook replenishment rate of RM1.10 bln for the year. In the meantime, Kimlun is tendering for some RM1.50 bln worth of construction contracts, mainly for mega-infrastructure road projects, coupled with affordable housing projects. Going forward, Kimlun’s outstanding orderbook of RM1.67 bln as at 31st December 2016, implying a construction orderbook cover ratio of 1.9x its 2015’s segment earnings (see Appendix 1), will provide earnings visibility until 2020. We expect the group to secure some RM700 mln worth of new contracts for 2017 and 2018 respectively.

Over at the manufacturing segment, the group clinched the supply and delivery of precast concrete tunnel segment linings to the Mass Rapid Transit 2 (MRT2) project worth RM52.8 mln in 4Q2016. This boosted its outstanding manufacturing orderbook to approximately RM260.0 mln that will sustain its segment earnings over the next 2-3 years. Elsewhere, the tender for the tunnel lining segment for the deep tunnel sewerage system in Singapore has been called in October 2016 and is expected to be awarded in 2017.

Meanwhile, the group’s unbilled property sales of approximately RM10.0 mln from its maiden property project, The Hyve, will be recognised progressively in 2017. However, there are no plans for future launches for now, owing to the subdue property market environment.

Valuation and Recommendation

As the reported earnings topped our forecast, we raised our net profit forecast by 11.0% and 15.8% to RM84.4 mln and RM89.5 mln in 2017 and 2018 respectively to reflect the stronger margins on its newly secured construction contracts.

With the earnings revision, we reiterate our BUY recommendation on Kimlun with a higher target price of RM2.55 (from RM2.35). Our target price is derived from ascribing an unchanged target PER of 11.0x to its revised 2017 construction earnings and PER of 6.0x (unchanged) 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 RM250.0 mln in 2017 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 future property launches.

Source: Mplus Research - 28 Feb 2017