- We maintain BUY on Kimlun Corporation Bhd with a lower fair value of RM3.20/share (vs. RM3.28/share previously) to reflect lower margins and deferred recognition of construction jobs.

- Kimlun posted a core net profit of RM16mil for 1HFY13, which is 37% lower compared with RM25.4mil last year. This made up 30% of both our and consensus estimates.

- 1HFY13 group revenue was flattish at RM449mil YoY (vs. RM446mil in 1HFY12). This was due to a slower recognition of construction revenue (-12% YoY). Note that in 1HFY12, the group saw strong contributions from two big projects that had since been completed.

- Construction gross profit margin declined to 8% (vs. 9% a year earlier) due to a less efficient absorption of overhead costs and higher depreciation and payroll costs.

- Nevertheless, the slower construction revenue was mitigated by the manufacturing division (115% YoY topline growth) due to higher delivery of tunnel lining segments (TLS) and segmental box girders (SBG) for the KVMRT project. However, margins were squeezed (12% vs. 24% a year earlier) due to “carriage onward expenses” which were related to delivery cost of products.

- Looking forward, management hints that construction earnings would be muted in the 2H. While its outstanding construction order book remains healthy (RM1.3bil as at endJune), the bulk of it would only be recognised next year. Kimlun has won RM680mil of new jobs this year, which exceeded our RM650mil assumption (FY12: ~RM800mil).

- Yesterday, Kimlun also announced that it has won a RM60mil job from Mah Sing to construct factories in Johor. This bodes well but we only expect the bulk of these jobs to only be recognised from next year onwards.

- For its manufacturing arm, management indicates that margins are likely to remain muted until its Senawang plant reaches an optimal utilisation level (~40% currently). Manufacturing order book as at end-June totalled RM400mil.

- We trim our FY13F earnings to account for the lower margins and deferred recognition of construction jobs. At the same time, we raise FY14F earnings as we expect margins to normalise with the bulk of the construction and KVMRT jobs to be recognised by then.

- We continue to like Kimlun as a proxy to the surge of construction works in Iskandar Malaysia and MRT jobs in Singapore and the Klang Valley. At the current level, Kimlun is trading at attractive 5x-10x PEs for FY13F-15F.

Source: AmeSecurities