- We maintain HOLD on Kimlun Corp Bhd with an unchanged SOP-based fair value of RM1.38/share.

- Following a recent meeting, we maintain our muted outlook on the group given the general market slowdown in Johor as well as flattish margin growth expectations.

- Management highlighted a shift of launches from high-rise buildings to affordable houses and industrial offerings in Johor. Also, launches have also moved from Medini and Danga Bay to areas such as Skudai and Kempas.

- The shift in new offerings is reflected in Kimlun’s new construction contract wins of RM484mil for FY15 YTD (FY14: RM270mil) (see Exhibit 2).

- Given the shift in product mix, management is hopeful of improving construction margins moving forward (FY14 gross margin: 6%), as affordable homes typically require less specialist and sub-con services. Typically, sub-con services make up ~35% of a contract value.

- Kimlun currently has a tender book of ~RM700mil, with a higher proportion of affordable homes projects currently compared to previously.

- For the construction division, it expects margins to improve on the back of higher recognition of its Singapore jobs following the completion of the KVMRT ones.

- Kimlun has completed delivery of tunnel lining segments (TLS) for KVMRT1. It has also secured 3 packages for Singapore’s Thomson line thus far (amounting to ~SGD43mil) and is bidding for more packages.

- For FY15 YTD, it has won RM30mil worth of jobs for the manufacturing division (FY14: RM140mil). It is looking to secure ~RM100mil this year, mainly from Singapore and other minor local jobs.

- Kimlun expects KVMRT 2 tenders to come out in 2H15, but we are less sanguine on the timeline. It also expects LRT3 tenders to come out this year. Other prospects in Singapore include the deep tunnel sewerage system and MRT Eastern Region line (tenders expected in 2016).

- As at end-Dec 2014, its HYVE project in Cyberjaya was 42% completed with a 72% take-up rate. Kimlun will launch 131 residential homes in Pontian, Johor, at the end of this month with a GDV of RM50mil.

- We remain cautious on Kimlun due to the general slowdown in Johor and maintain our conservative new order book of RM600mil for this year. We also expect margins to hover at the current levels (net margin of 4% for FY13-FY14 vs. 6% in FY12). Maintain HOLD.

Source: AmeSecurities