News

Awarded S$17.13m (~RM43.09m) tunnel lining segment (TLS) contract from SK Engineering & Construction for the East-West Transmission Cable Tunnel Project EW2. The project is expected to spread over a period of ~33 months.

Highlights

Sizable for manufacturing… As indicated in our report “Building up steadily” dated 5 Mar-13, this award was within expectations. It is a sizable size for the manufacturing division, translating to 46% of FY13’s manufacturing revenue. However, we note that this will just replenish orders for its 3 Johor plants as the division’s earnings growth will come from the KVMRT project.

About the order… The supply of TLS is part of Singapore Power’s S$2bn next-generation power infrastructure project whereby two cross-island cable tunnels, measuring a total of 35km in length, will be constructed 60m underground to provide long-term solution for its power cable grid infrastructure in Singapore (see Figure #1).

More to come… The power infrastructure project is divided into 6 packages to 5 construction companies (see Figure #2) and we believe that Kimlun has the potential to secure more packages. By having secured a package, it will give Kimlun the advantage of economies of scale to bid competitively for the 5 remaining TLS packages. Assuming that the remaining packages are of similar size, the estimated contract size works out to ~S$85m (~RM214m). However, due to supply chain risk management, we do not expect Kimlun to secure all of it.

1.8 sen/share… Assuming a PATAMI margin of 10%, this order translates to 1.8 sen/share for Kimlun.

Visibility… Overall, Kimlun has an outstanding construction order book of ~RM1.2bn and ~RM440m manufacturing orders. This translates to ~1.5x and ~4.7x 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 Jun 2013