Investment Highlights

• We raise our FY17-19F forecasts by 2%, 8% and 10%, increase our FV by 8% to RM2.76 from RM2.61 and maintain our BUY call. Our FV is based on 12x revised FY18F FD EPS of 23 sen, which is in line with our 1-year forward target PE of 10-12x for small-cap construction stocks.

• This follows the award to Kimlun of a RM214.8mil contract by Hillcrest Gardens Sdn Bhd for the construction of two condominium blocks in Mukim Petaling, Selangor.

• The latest contract has boosted Kimlun’s YTD construction job wins to RM820mil, surpassing our target of RM700mil for full-year FY17F. We therefore raise our assumption for FY17F construction job wins to RM900mil, resulting in the above mentioned earnings upgrades. For FY18-19F, we keep our assumption for construction job wins at a more normalised level of RM700mil annually.

• With the latest contract, we estimate that Kimlun’s outstanding construction order book now stands at about RM2.2bil which will keep it busy at least for the next 12-18 months.

• 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 FD EPS to contract by 20.0% 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 (+26.8%) 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. It 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 - 18 Sept 2017