- We maintain HOLD on Kimlun Corp Bhd with an unchanged SOP-based fair value of RM1.38/share. This implies a PE of 13x FY15F core FD EPS.

- Kimlun reported a 12% increase in core net profit to RM30mil for 1HFY15. Earnings exceeded expectations – making up 75% of our and 67% of consensus’ estimates.

- The better-than-expected performance can be attributed to better margins against a 9% fall in revenue.

- The group’s net margins improved to 5% (vs. 4% previously) due to execution of projects with better margins, lower raw material price and fuel costs, as well as a lower tax rate.

- Sequentially, 2Q earnings grew 10% on the back of a 20% decline in revenue. Net margin improved to 6% vs. 4.4% in 1Q.

- Revenue for its construction arm fell 3% YoY during the 6M period. However, gross profit expanded by 9%, buoyed by lower costs and the execution of projects that yield better margins.

- As for its manufacturing division, sales tapered off by 11% sequentially as the bulk of segmental box girder (SBG) orders were completed in 1Q. Fortunately, tunnel lining segments (TLS) and jacking pipe (which yield better margins) orders drove the segment’s growth in 2Q.

- As at end-June, the group had an outstanding construction and manufacturing order books of RM1.2bil and RM220mil, respectively. This, together with unbilled property sales of RM65mil for the Hyve project (76% takeup rate), should support future earnings.

- Prospects will be supported by upcoming tenders for KVMRT2 and LRT2 jobs amid a macro slowdown in Johor. The strengthening SGD (vs. RM) is a boon for Kimlun as it seeks packages for MRT projects across the Causeway.

- YTD, the group has secured RM422mil worth of jobs – within our new order book assumption of RM600mil.

- While margins surprised on the upside, we maintain our numbers for now as we seek further clarity from management on sustainability. We maintain HOLD.

Source: AmeSecurities Research - 28 Aug 2015