Results Highlights

• Kimlun’s 2Q2017 net profit declined 38.7% Y.o.Y to RM14.8 mln, mainly due to: (i) lower contribution from the construction segment as several projects secured in mid-2016 are at the early stages of completion, (ii) completion of delivery of tunnel lining segment (TLS) supply orders for Singapore’s MRT Thomson Line underground power transmission network in 2016, and (iii) the supply of segmental girder box (SGB) and TLS for the Klang Valley Mass Rapid Transit 2 (KVMRT2) will only pick up towards end-2017. Consequently, revenue for the quarter fell 20.9% Y.o.Y to RM194.8 mln.

• For 1H2017, cumulative net profit contracted 26.8% Y.o.Y to RM30.2 mln. Revenue for the period decreased 24.1% Y.o.Y to RM365.0 mln. The reported earnings came slightly below our expectations, accounting to 45.6% of our full year estimated net profit of RM66.2 mln. Meanwhile, the reported revenue also came slightly below expectation, accounting to 44.9% of our full year revenue forecast of RM812.6 mln.

• The group’s gross profit for 1H2017 fell 26.9% Y.o.Y to RM55.7 mln. Despite that, Kimlun’s gross profit margin only declined marginally lower to 15.3% vs. 15.8% reported in the previous corresponding quarter, sustained by the execution of better margin projects.

• As of 2Q2017, Kimlun’s net gearing stood at 4.5%, slightly higher from 3.9% recorded in 1Q2017 as the group gears up for the construction works of the Pan Borneo Highway project in Sarawak.

Prospects

After a relatively quiet 1Q2017, Kimlun has bagged a major contract valued at RM263.0 mln for the construction of an office complex for Majlis Bandaraya Johor in 2Q2017. The group’s construction orderbook replenishment now amounts to 43.8% of our 2017 orderbook replenishment rate of RM700.0 mln. Going forward, its unbilled construction orderbook of RM1.98 bln – implying a construction orderbook cover ratio of 2.6x to its 2016’s segment revenue of RM753.1 mln, will provide earnings visibility until 2020. We are sanguine on Kimlun’s prospects, backed by its sizable unbilled orderbook, coupled with its tenderbook of over RM1.00 bln for buildings, highway-related and RAPID projects.

Following the weaker manufacturing segment’s results in 1H2017, we reckon the aforementioned segment’s earnings could be relatively lower in the remainder of 2017. However, we expect a recovery moving into 2018, coming from the commencement of delivery of TLS and SBG orders to the KVMRT2 project in end-2017. Its’ outstanding manufacturing orderbook of RM320.0 mln will underpin its segment earnings over the next 2-3 years.

On the property development’s segment, the group’s unsold property sales of RM47.0 mln from both its property project, The Hyve and Taman Puteri will be recognised upon any completion of sales. With no plans for future launches in 2017, we think that the contribution from the property development segment continue to be minimal.

Valuation and Recommendation

Despite 1H2017 earnings coming slightly below our forecast, we leave our earnings forecast unchanged as we think that the group’s earnings should pick-up in 2H2017, particularly towards end-2017 as several construction projects will be at the advance stages of billing, coupled with the higher contributions from the delivery of SGB orders for the KVMRT2 project.

Hence, we reiterate our HOLD recommendation on Kimlun with an unchanged target price of RM2.30. Our target price is derived from ascribing an unchanged target PER of 11.0x to its 2018 construction earnings and PER of 6.0x (unchanged) to its manufacturing earnings, while its property development segment’s valuation remains 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 - 30 Aug 2017