Results Highlights

• Kimlun’s 1Q2018 net profit declined 17.8% Y.o.Y to RM12.6 mln, mainly due to higher depreciation charges, finance cost and the inclusion of a RM1.3 mln gain from disposal of property, plant and equipment in the previous corresponding quarter. Revenue for the quarter, however, added 29.8% Y.o.Y to RM220.9 mln.

• The reported earnings came below our expectations, accounting to only 16.5% of our previous full year estimated net profit of RM76.6 mln. Meanwhile, the reported revenue also came below our expectation, accounting to 21.5% of our previous full year revenue forecast of RM1.03 bln. The variance in the earnings was due to higher depreciation charges coupled with lower margins recorded by the manufacturing segment.

• The group’s gross profit for 1Q2018 added 8.5% Y.o.Y to RM27.3 mln. Despite that, Kimlun’s gross profit margin fell to 12.4% vs. 14.8% reported in the previous corresponding quarter as contributions from the manufacturing and trading segment declined due to slowdown in delivery of precast concrete products for the Klang Valley Mass Rapid Transit Line 2 (KVMRT 2) project, higher composition of low margin products sold and stronger Ringgit against the Singapore Dollar.

• As of 1Q2018, Kimlun’s net gearing stood at a relatively low level at 9.7% – implying room to undertake further leverage for business expansion, if needed.

Prospects

It was another muted quarter for Kimlun in 1Q2018 as the group failed to secure any major construction contract. Hence, we have imputed a lower construction orderbook replenishment to our assumption at RM200.0 mln and RM500.0 mln for 2018 and 2019 respectively (down from RM600.0 mln for both 2018 and 2019) to account for the probable deferment/delay/termination of infrastructure projects coupled with potential revision on the value of future construction contracts (see Appendix 1) as the new government is poised to implement an austerity drive. Going forward, earnings visibility will be anchored by an unbilled construction orderbook of approximately RM1.58 bln (construction orderbook cover ratio of 1.8x to its 2017’s segment revenue of RM872.4 mln) over the next two years.

Elsewhere, the group’s outstanding manufacturing orderbook of approximately RM360.0 mln will provide earnings visibility over the next 2-3 years. However, we anticipate slower new manufacturing orders in the local front as the new government is cutting infrastructure spending, including the Klang Valley Mass Rapid Transit Line 3 project that has been scrapped. Therefore, orders for its precast building materials are expected to dip in view of the fewer number of projects.

On the property development’s segment, the group’s unsold property sales of RM20.0 mln on The Hyve and Taman Puteri projects will be recognised upon any completion of sale. 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 launches in 2018 in view of the sluggish property market.

Valuation and Recommendation

With the reported earnings coming below our estimates, we trimmed our net earnings forecast by 15.3% and 15.4% to RM64.9 mln and RM64.8 mln for 2018 and 2019 respectively, to account for the lower orderbook replenishment prospects, coupled with the decline in manufacturing orders. Consequently, we downgrade our recommendation on Kimlun to HOLD (from Buy) with a lower target price of RM1.85 (from RM2.10).

Our target price is derived from ascribing an lower target PER of 8.0x (from 11.0x) to its 2018 fully diluted construction earnings to reflect the slowdown in the general construction sector and PER of 6.0x (unchanged) to its fully diluted 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 incomecould translate to a decline in purchasing power for its future property launches.

Source: Mplus Research - 31 May 2018