Results Highlights

• Kimlun’s 3Q2017 net profit declined 13.8% Y.o.Y to RM14.2 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) one-off provision for doubtful debt amounting to RM5.9 mln, and (iii) lower share profit from joint venture after its property development project – The Hyve was completed in 2016. Revenue for the quarter, however, gained 10.7% Y.o.Y to RM248.1 mln.

• For 9M2017, cumulative net profit slipped 23.1% Y.o.Y to RM44.4 mln. Revenue for the period fell 13.1% Y.o.Y to RM613.1 mln. The reported earnings came in slightly below our expectations, accounting to 66.9% of our previous full year estimated net profit of RM66.4 mln. The variance is due to the one-off provision for doubtful debt as its normalised net profit for 9M2017 of RM48.8 mln would make up to 73.5% of our earnings forecast. Meanwhile, the reported revenue came in within expectation, accounting to 75.4% of our full year revenue forecast of RM812.6 mln.

• The group’s gross profit for 3Q2017 gained 19.3% Y.o.Y to RM36.7 mln. Consequently, Kimlun’s gross profit margin improved to 14.8% vs. 13.7% reported in the previous corresponding quarter, sustained by the better projects mix that yields higher margin.

• As of 3Q2017, Kimlun’s net gearing stood at 5.5%, slightly higher than the 4.5% recorded in 2Q2017 as the group gears up for the construction works on the Pan Borneo Highway project in Sarawak.

Prospects

Although Kimlun did not manage to secure any major construction projects in 3Q2017, the group has already bagged a total of RM527.8 mln worth of contracts YTD – representing 88.0% of our orderbook replenishment assumption of RM600.0 mln for 2017. Moving forward, earnings visibility over the next 2-3 years will be underpinned by an unbilled construction orderbook of approximately RM2.05 bln – implying a construction orderbook cover ratio of 2.7x to its 2016’s segment revenue of RM753.1 mln. Similar with 2017, we expect the group to secure some RM600.0 mln worth of construction projects in 2018 from its tenderbook of over RM1.00 bln comprising of RAPID related projects, building and non-building projects.

Meanwhile, the manufacturing segment’s outstanding orderbook of approximately RM350.0 from six projects (three each in Malaysia and Singapore) will provide earnings visibility over the next 2-3 years. We reckon that Kimlun is also one of the major beneficiaries of Budget 2018 with potential job flows from mega-infrastructure projects such as the Klang Valley Mass Rapid Transit 3 (KVMRT3), Light Rail Transit 3 (LRT3) and the East Coast Rail Line (ECRL)

On the property development’s segment, the group’s unsold property sales of RM42.0 mln from The Hyve and Taman Puteri will be recognised upon any completion of sales with the Taman Puteri project in Pontian, Johor saw a take-up rate of close to 50%. We expect the aforementioned segment contribution to the group’s top and bottom line to be minimal with no plans to launch new projects on the balance 155.0 ac. of landbank.

Valuation and Recommendation

With the reported earnings coming below our estimates, we trim our net earnings forecast by 9.4% and 3.0% to RM60.2 mln and RM73.1 mln for 2017 and 2018 respectively, to account for the one-off provision of doubtful debt coupled with lower construction segment margins arising from costs escalation that is expected to linger into 2018.

Despite that, we reiterate our HOLD recommendation on Kimlun with an unchanged target price of RM2.40. 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 2018 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 Nov 2017