Investment Highlights

• We maintain our forecasts, FV of RM2.61 and BUY call, following Kimlun's 1HFY17 results that came in within our expectations at 46% of our full-year forecast, but missed market expectations at only 42% of the full-year consensus estimates.

• Our FV is based on 12x FY18F FD EPS, which is in line with our 1-year forward target PE of 10-12x for small-cap construction stocks.

• 1HFY17 net profit declined 27% YoY. Kimlun's large ongoing construction jobs were at the tail-end while the newer ones had yet to hit major billings milestones. Similarly, for the manufacturing division, Kimlun was during 1HFY17 completing orders from Singapore, while the delivery of orders from MRT2 had yet to pick up significantly.

• Nonetheless, its near-term earnings visibility remains good, underpinned by construction and manufacturing order backlogs of RM1.98bil and RM320mil respectively, which will keep it busy at least for the next 1-2 years.

• We continue to like Kimlun as it is a good proxy to the booming local construction sector given its involvement in the MRT2 (supply of precast concrete segments), Pan Borneo Highway and the construction of affordable housing.

• We project Kimlun's net profit to contract by 19.9% in FY17F from a high base a year ago (largely due to lumpy variation order claims recognised during the year). Its earnings growth momentum should resume in FY18F (+19.8%) underpinned largely by the recovery in manufacturing earnings as production and delivery of the MRT2 and Eastern Rail Link (Singapore) orders gather pace.

• Kimlun's earnings profile has improved tremendously as it no longer relies solely on residential building jobs, but has expanded to the construction of a hospital (Gleneagles Medini, RM105mil), a shopping mall (IGB's Southkey Megamall, RM38mil), hostels (Sime Darby's Pagoh Education Hub, RM38mil) and a government office (Johor Bahru City Council complex, RM263mil), as well as infrastructure (a section of Pan Borneo Highway, RM1.46bil, via a 30%-owned JV with Zecon).

• Similarly, its manufacturing unit has widened its product offering with the latest being rail sleepers and parapet walls.

Source: AmInvest Research - 30 Aug 2017