Highlights

Higher earnings base… We believe that Kimlun will leapfrog into a higher earnings base from FY14 onwards which is sustainable for at least 3 years until FY16, driven by (1) Recovery in construction GP margin; (2) Contribution from its 4th manufacturing facilities; and (3) Property development profits. Hence, at the current share price (RM1.53), FY13 P/E multiple will compress from 7x to 5.4x in FY14 compared to the construction sector’s P/E of 11x.

Construction margin to expand… Construction GP margin is expected to recover in from 2HFY13 onwards. For FY13, we are forecasting a GP margin of 8.5%. Based on our sensitivity analysis, a 50 bps increase/cut in GP margin will increase/reduce our estimated EPS by 7%. Hence, it will impact our Target Price by 7%.

Pre-casted earnings… The 4th manufacturing facilities which has been set up to cater for the KVMRT segmental box girders and tunnel lining segments worth RM223m and RM48.5m respectively will chip in to support FY13 earnings growth and beyond.

Cyber earnings… The key earnings growth driver beyond FY14 will be largely derived from the Hyve, Cyberjaya (51%- stake, GDV: RM200m), development profits which has achieved 90% booking.

Mini Iskandar play… By FY15, we believe that the recent land acquisition in Medini with a GDV of ~RM450m will continue to sustain its higher earnings base as it will continue to pick up where the Hyve development profits have peaked. With the recent strong interest in Iskandarrelated property counters, we believe that the Iskandar factor may act as a near term catalyst for Kimlun’s share price.

Healthy order book… Overall, Kimlun has an outstanding order book of RM1.2bn and RM400m manufacturing orders. This translates to 1.5x and 4.2x FY12’s construction revenue and manufacturing revenue respectively.

Risks

Execution risk; Regulatory and political risk (both local and abroad); Rising raw material prices; and Unexpected downturn in the construction and property cycle.

Forecasts

Introducing FY15 earnings forecast. Property development profits are anticipated to be a key earnings growth driver for the company beyond FY14 onwards

Rating

BUY

With our top picks in the construction sector – Gamuda (TP: RM4.28) and WCT (TP: RM2.57) reaching close to our TP levels, we believe that interest will now flow to the mid/small cap construction players. We believe that the consensus have not factored in the earnings upside from the property development profits which will serve as a positive rerating catalyst. Meanwhile, Kimlun’s estimated dividend payout ratio of 30% also translates to a decent yield of 4%. Hence, we maintain our BUY call on Kimlun.

Valuation

• Maintain TP of RM2.18 based on unchanged 10x FY13 earnings.

Source: Hong Leong Investment Bank Research - 03 Apr 2013