Investment Highlights

• We cut our FY17-19F forecasts by 11%, 4% and 2%, trim our FV by 4% to RM2.64 (from RM2.76) but maintain our BUY call. Our FV is based on 12x revised FY18F FD EPS, which is in line with our 1-year forward target PE of 10- 12x for small-cap construction stocks.

• Kimlun's 9MFY17 net profit missed expectations, coming in at only 67% and 64% of our full-year forecast and the full-year consensus estimates respectively. We believe the variance against our forecast came largely from the weaker-than-expected billings from both the construction and manufacturing divisions.

• 9MFY17 net profit declined 23% YoY. Kimlun's large ongoing construction jobs were at the tail end while the newer ones had yet to hit major billing milestones. Similarly, for the manufacturing division, Kimlun was completing orders from Singapore during 9MFY17, while the delivery of orders from the MRT2 had yet to pick up significantly.

• Nonetheless, its near-term earnings visibility remains good, underpinned by construction and manufacturing order backlogs of RM2.05bil and RM350mil respectively, which will keep it busy for at least the next 1-2 years.

• We now project Kimlun's FD EPS to contract by 30% 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 (+38%).

• 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. Kimlun's earnings profile has improved tremendously as it no longer relies solely on building jobs, but has expanded to infrastructure (Pan Borneo Highway). Similarly, its manufacturing unit has widened its product offering with the latest being rail sleepers and parapet walls.

Source: AmInvest Research - 30 Nov 2017