Results

1HFY13 earnings fell by 37% to RM16.0m (6.65 sen/share), missing estimates by making up 30% of ours and consensus’ estimates.

Deviations

Due to weaker than expected construction contribution and higher overall expenses.

Dividends

Dividends most likely declare in 4Q given the higher working capital required.

Highlights

Results review… 1HFY13 revenue grew by 1% to RM448.7m, buoyed by stronger manufacturing revenue which mitigated the fall in construction revenue. The construction division had a bad 1HFY13, with GP margin compressing to 7.5% from 8.7%. Likewise, manufacturing GP also fell to 17.5% from 27.1% due to start-up costs for its new plant. Coupled with higher expenses and financing charges, earnings fell by 37%.

Mah Sing order… Kimlun has secured a RM59.07m contract from Mah Sing for the construction of factories in Johor Bahru. The project is expected to be completed by Oct-14. This order marks Kimlun’s 4th major contracts win for the year. Hence, bringing YTD jobs won to RM682m, which makes up 97.4% of our RM700m order book replenishment assumption for FY13. Assuming a PAT margin of 10%, the project translates to 2.5 sen/share for the company.

Earnings visibility… Overall, Kimlun has an outstanding construction order book of RM1.3bn and RM400m manufacturing orders. This translates to 1.6x 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

FY13-15 earnings slashed by 19.2%, 11.2% and 6.3% respectively to account for weaker construction contribution and higher expenses.

Rating

HOLD

It is unfortunate that the construction division has been hampered by timing issues on profit recognition while its new manufacturing facilities will be faced with longer gestation period. On the bright side, we are pleased with the way the management has handled this earnings disappointment by hosting a conference call to address investor concerns.

Although Kimlun will perform better next year given the recovery in construction margin, streamlining of new manufacturing facilities and additional property development contribution, we do not see much positive catalysts for the time being. Hence, we downgrade Kimlun to a HOLD call.

Valuation

TP reduced by 19.3% to RM1.76 from RM2.18 based on unchanged 10x FY13 earnings.

Source: Hong Leong Investment Bank Research - 30 Aug 2013