- We upgrade Kimlun Corp Bhd to BUY (from HOLD) with a higher fair value of RM1.60/share (vs. RM1.38/share earlier) – pegged at 8x FY16F FD EPS.

- Our upgrade is premised on Kimlun’s improving margins and strong position to secure packages for the upcoming KVMRT2 project.

- For the 9M period, Kimlun’s earnings rose 40% to RM49mil on the back of a 12% dip in revenue. Notably, Kimlun’s pre-tax margin expanded to 8% vs. 5% a year earlier. Excluding the RM10.77mil gain from the disposal of land a year earlier – core earnings rose 100%, which exceeded both our and market expectations.

- The main variance can be attributed to improving margins for both its construction and manufacturing divisions. These helped to mitigate the decline in revenue. Group PBT margin rose to 8% (vs. 5.7% a year earlier).

- The fall in revenue was due to the lower amount of construction jobs completed during the period and lower sales of segmental box girders (SBG). Nevertheless, the construction margins had improved due to the execution of construction jobs that yielded higher margins, lower raw material prices, and fuel prices. As for its manufacturing arm, the margin also improved on the back of the appreciating SGD (vs. MYR) as well as the recognition of the tunnel lining segments (TLS) that yielded better margins.

- All in, construction and manufacturing margins expanded by 2.4ppts and 9.5ppts, respectively, to 8% and 26% for the 9M period. Kimlun also benefited from a forex gain of RM4.8mil in the group’s sales to Singapore, which helped to reduce its selling and administrative expenses by RM5mil.

- As at end-Sept, Kimlun outstanding construction and manufacturing order books stood at RM940mil and RM200mil respectively.

- YTD, Kimlun has secured RM554mil worth of construction jobs – within our assumed replenishment rate of RM600mil (FY14: RM270mil). We assumed a replenishment rate of RM650mil next year as the group eyes jobs in the affordable housing segment.

- Tenders for the supply of SBG and TLS packages for KVMRT2 are expected to be called by year-end. Kimlun should be a frontrunner in securing these contracts given its experience in KVMRT1 (delivery of ~RM270mil worth of products) and available capacity at its Senawang plant (~30% utilisation rate). We forecast Kimlun to secure RM250mil worth of KVMRT2 packages next year.

- After a lull in FY14, Kimlun looks attractive given its improving margins and good position to secure packages for the KVMRT2. We deem our 8x PE target to be fair (vs. its 3-year mean of 9x) for a small-to-mid cap construction outfit.

Source: AmeSecurities Research - 27 Nov 2015