Results Highlights

• Kimlun’s 4Q2017 net profit improved marginally by 0.4% Y.o.Y to RM24.3 mln as growth at the topline was offset by the higher operating expenses, a one-off provision for doubtful debt amounting to RM4.3mln and a foreign exchange loss. Revenue for the quarter, however, gained 58.1% Y.o.Y to RM372.1 mln.

• For 2017, cumulative net profit fell 16.1% Y.o.Y to RM68.7 mln. Revenue for the year, however, climbed 4.7% Y.o.Y to RM985.2 mln. The reported earnings came in above our expectations, accounting to 114.2% of our previous full year estimated net profit of RM60.2 mln. Meanwhile, the reported revenue was also above our expectation, accounting to 121.2% of our full year revenue forecast of RM812.6 mln on higher contributions from both the construction and property development segments.

• The group’s gross profit for 4Q2017 added 4.5% Y.o.Y to RM45.7 mln. Despite that, Kimlun’s gross profit margin fell to 12.3% vs. 18.6% reported in the previous corresponding quarter as certain construction contracts are still at the initial stage of construction, coupled with higher raw material cost.

• As of 4Q2017, Kimlun’s net gearing stood at 3.7%, slightly lower than the 5.5% recorded in 3Q2017, implying room to undertake further leverage for business expansion.

Prospects

Likewise in 3Q2017, we note that it was a relatively quiet 4Q2017 for Kimlun as the group did not secure any major contract. Nevertheless, the three major contracts with a combined value of RM527.8 mln won in 1H2017 (see Appendix 1) already represents 88.0% of our orderbook replenishment assumption of RM600.0 mln for 2017.

We expect earnings to be anchored by an unbilled construction orderbook of approximately RM1.79 bln (construction orderbook cover ratio of 2.1x to its 2017’s segment revenue of RM872.4 mln) will provide earnings visibility over the next two years. Moving forward into 2018, we expect a construction orderbook replenishment rate of RM600.0 mln from its tenderbook of over RM1.00 bln comprising of affordable housing and infrastructure jobs from the government.

On the other hand, the group’s outstanding manufacturing orderbook of RM340.0 mln will provide earnings visibility over the next 2-3 years. We think that Kimlun is well positioned to undertake a slice of the High Speed Rail project, given its strategic manufacturing plant locations at Senawang, Negeri Sembilan and Ulu Choh, Johor.

On the property development’s segment, the group’s unsold property sales of RM20.0 mln from The Hyve and Taman Puteri will be recognised upon any completion of sales. As of end 2017, The Hyve and Taman Puteri saw a take-up rate of approximately 90.0% and 50.0% respectively. There are also no plans for new property development launches in 2018.

Valuation and Recommendation

With the reported earnings coming above our estimates, we raised our earnings forecast by 27.3% and 12.1% to RM76.6 mln and RM86.4 mln for 2018 and 2019 respectively, to account for the higher construction segment margins coupled with the pickup in delivery of manufacturing orders.

We also upgrade our recommendation on Kimlun to BUY with a higher target price of RM2.60 (from 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 - 28 Feb 2018