Results

Reported 1Q PATAMI came in at RM19.9m (+122% yoy, +47% qoq) but this was masked by a one-off disposal of its land in Nilai worth RM46.46m.

Ex-EI, core 1Q earnings came in at RM9.1m, making up 19- 20% of HLIB and street’s estimates respectively.

Deviations

Construction division: 1Q GP margin for construction was a weak 6.4%, as the majority of its projects comprise of highrise developments which entail higher costs for specialist contractors and clients’ nominated sub-contractors services. We have revised our margin assumption accordingly.

Property division: New take up for The Hyve has been slow, having stayed stagnant at 70% for 1Q. We have tone down our take up assumption for FY14 as a result.

Dividends

None.

Highlights

1Q topline boosted by EI. 1Q revenue enjoyed strong growth (+56% yoy and +22% qoq) to hit RM335.1m, a record high, but we note that this included a one-off disposal gain from Nilai land amounting to RM46.46m (announced in Oct 13), which was booked in Jan 14. Stripping this EI away from the property segment, progress billings from the Hyve clocked in at a modest at RM8.1m, but we expect earnings contribution from this project to increase in subsequent quarters as it should achieve the 50% completion milestone by year-end.

Weaker construction margins. The construction division saw growth at the topline, with segment revenue rising 37% yoy and 11% qoq to RM241m. However, construction GP margin contracted 2.0ppts yoy to 6.4% due to a higher proportion of high-rise projects, which make up the bulk of its RM1.02bn contract wins for FY13.

Healthy visibility. Topline should remain healthy as Kimlun has an estimated outstanding construction/manufacturing order book of RM2.09bn, translating to ~2.2x FY13’s construction/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

Given the weaker outlook for its construction margin and takeup rates for its property segment, we are reducing our FY14-15 forecast by 20-22%.

Rating

HOLD

Despite unexciting earnings outlook, we deem its current valuations as fair and maintain our HOLD call.

Valuation

Reduce TP from RM1.63 to RM1.54 based on unchanged 10x mid-FY14 earnings.

Source: Hong Leong Investment Bank Research - 2 Jun 2014