News

Kimlun has secured a RM70.5m contract from SP Setia for the construction of apartments and ancillary buildings in Johor Bahru. The project is expected to be completed by Oct-15.

Highlights

6th major win… The latest order is Kimlun’s 6th major contract win for the year. It is a decent size, making up 9% of FY12’s construction revenue and 4% of its previous outstanding order book of RM1.63bn. YTD, we estimate that Kimlun has secured RM1.15bn worth of projects, which has exceeded our RM700m order book replenishment assumption for FY13.

Earnings visibility… Overall, Kimlun has an estimated outstanding construction order book of RM1.7bn and RM400m manufacturing orders. This translates to 2.1x 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

Although contract wins have exceeded our RM700m order book replenishment assumption for FY13, earnings contribution will only be material from FY14 onwards. Hence, we are keeping our estimates unchanged for now, pending margin recovery.

Rating

HOLD

Although Kimlun had a good year in terms of contract wins, we are maintaining our HOLD call until we see indications of construction margins recovery and digestion of its new manufacturing facilities.

Positives: (1) Bigger than expected contract wins. (2) Recovery in earnings margin. (3) Contribution from Cyberjaya property development.

Negatives: (1) Longer than expected gestation period of new manufacturing facilities. (2) Sharp slowdown in the property sector which may affect existing property-related projects.

Valuation

Although consensus has rolled over their valuation to FY14 earnings (hence the higher TP), we prefer to maintain conservative by maintaining our TP of RM1.76 based on unchanged 10x FY13 earnings

Source: Hong Leong Investment Bank Research - 28 Oct 2013