Results Highlights

• Kimlun’s 2Q2018 net profit slipped 33.4% Y.o.Y to RM9.8 mln, mainly due to higher recognition of lower margin construction projects, coupled with higher depreciation charges. Revenue for the quarter, however, added 11.9% Y.o.Y to RM218.0 mln.

• For 1H2018, cumulative net profit fell 25.7% Y.o.Y to RM22.4 mln. Revenue for the period, however, gained 20.3% Y.o.Y to RM439.0 mln. The reported earnings came below our expectations, accounting to only 36.3% of our previous full year estimated net profit of RM61.9 mln. Meanwhile, the reported revenue also came slightly below our expectation, accounting to 46.7% of our full year revenue forecast of RM940.2 mln. The variance in the earnings was due to higher depreciation charges, coupled with lower margins recorded by the construction segment.

• The group’s gross profit for 2Q2018 declined 17.4% Y.o.Y to RM24.0 mln, translating to a lower gross profit margin of 11.0% vs. 14.9% reported in the previous corresponding quarter due to margin contractions in both the construction (higher overhead cost) and trading & manufacturing segment (segmental box girders and tunnel lining supply to the Klang Valley MRT yields lower margins).

• As of 2Q2018, Kimlun’s net gearing stood at a relatively low level of 15.2% – implying room to take up more debt for business expansion when necessary

Prospects

After a relatively quiet period in 1Q2018, Kimlun bagged its first major construction contract in 2Q2018 for the design and building of roads and interchange in Johor Bahru for RM144.1 mln. This accounts to 28.8% of our orderbook replenishment assumption of RM500.0 mln for 2018. (see Appendix 2). Moving forward, earnings visibility will be supported by an unbilled construction orderbook of approximately RM1.70 bln (construction orderbook cover ratio of 1.9x to its 2017’s segment revenue of RM872.4 mln) over the next two years.

Elsewhere, the group has secured the supply of pre-cast concrete building components to Singapore valued at RM80.4 mln in 2Q2018, bringing its manufacturing orderbook replacement YTD to RM116.1 mln. With the KV MRT3 postponed, we reckon its manufacturing orderbook replenishment in the local front will remain subdued over the near term. Nevertheless, its unbilled manufacturing orderbook of approximately RM400.0 mln will sustain the segment’s earnings over the next three years.

On the property development segment, the group’s unsold property sales of approximately RM20.0 mln from The Hyve and Taman Puteri projects will be recognised upon the completion of their sale. As of 1H2018, The Hyve and Taman Puteri saw a take-up rate of approximately 90.0% and 50.0% respectively. However, there are no plans for new property launches in the remainder of the year in view of the sluggish property market.

Valuation and Recommendation

After the reported earnings came below our estimates, we trimmed our net earnings forecast by 25.8% and 15.1% to RM48.1 mln and RM55.0 mln for 2018 and 2019 respectively to account for the lower margins in both the construction and manufacturing segments. We also rolled over our valuation metrics to 2019 and we downgrade Kimlun to a HOLD (from Buy) with a lower target price of RM1.55 (from RM1.85).

Our target price is derived from ascribing an unchanged target PER of 10.0x to its 2019 fully diluted construction earnings 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. Nevertheless, we continue to like Kimlun for its strong footing in the local construction industry, particularly in Johor Bahru, coupled with its exposure to the Malaysia and Singapore’s rail works.

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 RM500.0 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 Aug 2018