Results Highlights

• Kimlun’s 3Q2018 net profit gained 10.5% Y.o.Y to RM15.7 mln, lifted by the higher contribution from the manufacturing & trading segment that offset the weakness in both the construction and property development segments. Revenue for the quarter rose 5.8% Y.o.Y to RM262.4 mln.

• For 9M2018, however, cumulative net profit fell 13.9% Y.o.Y to RM38.2 mln. Revenue for the period added 14.4% Y.o.Y to RM701.2 mln. The reported earnings came slightly above our expectations, accounting to 79.4% of our previous full year estimated net profit of RM48.1 mln. Meanwhile, the reported revenue came within our expectation, accounting to 74.6% of our full year revenue forecast of RM940.2 mln. The better-than-expected earnings was due to higher contribution in the manufacturing & trading segment in fulfilling orders for the Pan Borneo Highway project, the KVMRT Line 2 project and an IBS components sales order.

• The group’s gross profit for 3Q2018 declined 12.6% Y.o.Y to RM31.3 mln, translating to a lower gross profit margin of 11.9% vs. 14.4% reported in the previous corresponding quarter, dragged down by margin contractions in the construction segment (higher overhead cost).

• As of 3Q2018, Kimlun’s net gearing stood at a relatively low level of 25.3% – providing further leeway to undertake external debt for business expansion when necessary.

Prospects

After bagging some RM197.6 mln worth of major new contracts in 2Q2018, the construction segment was relatively quiet moving into 3Q2018. Nevertheless, the group’s orderbook replenishment stands at RM361.6 mln YTD, making up 72.3% of our orderbook replenishment assumption of RM500.0 mln for 2018. (see Appendix 1). Moving forward, earnings visibility will be supported by an unbilled construction orderbook of approximately RM1.80 bln (construction orderbook cover ratio of 2.1x to its 2017’s segment revenue of RM872.4 mln) over the next 2-3 years.

With the inclusion of the RM80.4 mln contract for the supply and delivery of precast concrete building components to Singapore secured in 3Q2018, the group manufacturing orderbook at approximately RM400.0 mln will sustain the segment’s earnings over the next three years. Moving forward, we reckon that orders from the local front will remain subdued after the Budget 2019 announcement noted that the Klang Valley Mass Rapid Transit 3 (KV MRT3) project will be deferred until the completion of KV MRT Line 2, tentatively by July 2021.

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. Despite having 175.0 ac. of undeveloped land bank, there are no plans for new property launches for the remainder of the year in view of the sluggish property market.

Valuation and Recommendation

As the reported earnings came slightly above our estimates, we tweaked our earnings forecast higher by 9.5% and 4.8% to RM52.7 mln and RM57.7 mln for 2018 and 2019 respectively to account for the higher margins from the manufacturing segment. We also upgrade Kimlun to a BUY (from Hold) with a higher target price of RM1.60 (from RM1.55) as we deem that its PER valuations of 7.2x and 6.6x for 2018 and 2019 respectively are attractive as they are at the lower-end of the construction industry average of 9.0x.

Our target price is derived from ascribing an unchanged target PER of 9.0x 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. 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 salesorder 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 Nov 2018