Results

1QFY13 earnings fell by 16% to RM9.0m (3.72 sen/share), making up 17% of ours and consensus’ estimates.

Deviations

Due to seasonality and higher overall expenses. We expect a stronger performance in the subsequent quarters arising from its construction division and streamlined manufacturing contribution. Hence, we consider results to be largely in line.

Dividends

None. Dividends most likely declared in 4Q given the higher working capital required.

Highlights

YoY… Revenue climbed by 8%, driven by higher manufacturing orders for segmental box girders for the KVMRT project, while its construction revenue remained relatively unchanged. GP margin held steady at 10.3%, which resulted in GP to grow by 9%. However, due to higher expenses for its new manufacturing facilities and financing costs, earnings fell by 16%. EPS contracted slightly more, by 19%, due to the dilution from 5% private placement.

QoQ… Revenue fell by 9%, due to a seasonally slower quarter for the construction division, while growth in the manufacturing division mitigated this slowdown. GP margin recovered to 10.3% from 8.6% in the previous quarter, resulting in GP to grow by 9%. Due to higher expenses and financing costs, PBT only grew by 2%. Earnings fell further by 27% due to the absence of tax incentive for its new manufacturing facilities.

Hyve updates… Kimlun’s 51% maiden property development project – the Hyve, which has a GDV of RM200m, has achieved an overall 80% bookings/take-up rate. The recently launched 2nd tower has already achieved 50% bookings. The property division will help drive Kimlun’s earnings growth from FY14 onwards.

Earnings visibility… Overall, Kimlun has an outstanding construction 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

Unchanged.

Rating

BUY

• Positives: (1) Bigger than expected contract wins. (2) Recovery in earnings margin. (3) Contribution from Cyberjaya property development.
• Negatives: (1) Sharp slowdown in the property sector which may affect existing property-related project. (2) Longer than expected gestation period of new manufacturing facilities.

Valuation

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

Source: Hong Leong Investment Bank Research - 27 May 2013