Results

9MFY13 earnings fell by 38% to RM22.9m (9.52 sen/share), missing estimates by making up 54% and 57% of ours and consensus’ estimates respectively.

Deviations

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

Dividends

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

Highlights

3Q review… 3Q revenue grew 6% YoY but declined 3% QoQ to RM227.4m. Construction’s revenue continued to fall 8%/6% YoY/QoQ to RM177.6m with GP margin compressing to the lowest quarter ever of 5.1%. Weakness in the construction division was due to timing issue and higher start-up costs for its newly secured projects.

Meanwhile, manufacturing revenue surged by 97% YoY but cooled by 7% QoQ to RM49.4m. Manufacturing GP margin was steady at 17.1%. Property finally made its maiden contribution to top line with RM12.3m. Overall, due to higher expenses incurred for its expansion plans and higher financing costs, earnings fell by 41%/2% YoY/QoQ to RM6.9m.

9M review… Revenue grew by 2% to RM676.1m, lifted mainly by its manufacturing division. However, due to weakness in the construction division and higher overall expenses (as explained above), earnings fell by 38% to RM22.9m.

Strong backlog… The company backed by strong construction orders of RM1.74bn, translating to 2.2x FY12’s construction revenue and manufacturing orders of RM450m, translating to 4.8x FY12’s manufacturing revenue.

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

FY13/14/15 earnings slashed by 30.8%/8.7%/1.5% respectively to reflect the weaker construction division.

Rating

HOLD

We believe that Kimlun’s management will be able to resolve the teething issues arising from its expansion plans, while stronger property contribution will enhance its earnings profile. With the proposed rights issue, it will emerge stronger with a recapitalised balance sheet. We recommend longer term investors to HOLD on to the stock.

Valuation

We rollover our valuation to average FY13-14 earnings based on unchanged P/E multiple of 10x. Hence, our Target Price remains unchanged at RM1.76 (theoretical ex-rights TP of RM1.63).

Source: Hong Leong Investment Bank Research - 29 Nov 2013