Results Highlights

• Kimlun’s 1Q2017 net profit slipped 10.1% Y.o.Y to RM15.4 mln, mainly due to lower contribution form the construction segment as several projects are at the early stages of completion, while the manufacturing segment saw the completion of delivery of tunnel lining segment (TLS) supply orders for Singapore’s MRT Thomson Line underground power transmission network in 2016 and the supply of segmental girder box (SGB) and TLS for the Klang Valley Mass Rapid Transit 2 (KV MRT2) is at the initial stages. Revenue for the quarter slipped 27.5% Y.o.Y to RM170.2 mln.

• The reported earnings came below our expectations, accounting to 21.6% of our previous full year estimated net profit of RM71.1 mln. Meanwhile, the reported revenue also came below expectation, accounting to 19.1% of our previous full year revenue forecast of RM890.0 mln.

• The group’s gross profit for 1Q2017 fell 27.3% Y.o.Y to RM26.1 mln. Despite that, Kimlun’s gross profit margin remains unchanged at 15.3% as compared to the previous corresponding quarter, sustained by the execution of better margin projects.

• Kimlun’s 1Q2017 net gearing stood at 3.9%, down from 7.6% recorded in 4Q2016 – underlining the management’s prudence in maintaining a healthy balance sheet.

Prospects

Although Kimlun did not secure any major construction contracts year-to-date, the group’s achievement earlier in 2016 – having bagged RM990.4 mln worth of major construction contracts, brings its unbilled construction orderbook to RM1.59 bln. This implies a construction orderbook cover ratio of 2.1x to its 2016’s segment revenue which will provide earnings visibility till 2020. Kimlun is tendering for over RM1.0 bln worth of construction contracts and we expect an orderbook replenishment of RM700.0 mln for 2017 and 2018 respectively.

Albeit recording a 47.8% Y.o.Y decline in its manufacturing segment revenue to RM22.9 mln in 1Q2017, we think that both the top and bottom line will start to gear up in 2H2017. The improvement will be backed by the deliveries of TLS and SBG orders that were secured in late 2016. With its’ outstanding manufacturing orderbook at approximately RM330.0 mln, this will underpin its segment earnings over the next 2-3 years.

Meanwhile, the group’s unsold property sales of approximately RM20.0 mln from its maiden property project, The Hyve, will be recognised upon any completion of sales. Moving forwards, there are no plans for future launches in 2017, owing to the lackluster property market environment.

Valuation and Recommendation

As the reported earnings came below our forecast, we trimmed our net profit forecast by 9.6% and 1.6% to RM64.3 mln and RM74.9 mln in 2017 and 2018 respectively to reflect the lower contributions from both the construction and manufacturing segments.

Despite the earnings revision, we reiterate our HOLD recommendation on Kimlun with a lower target price of RM2.45 (previously RM2.55). 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 - 1 Jun 2017