Highlights

Key takeaways from  Kimlun’s briefing  include:

Construction  division…  The  construction  division’s  order book  has  dwindled  from  RM2.3bn  (in  end-FY13)  to RM1.52bn  (in  end-1H14,  translating  to  a  run  rate  of  2x  of FY13’s construction revenue), on the back of slower job wins YTD. Nevertheless,  it  is still looking to add RM600m worth of contracts for the remaining  months of 2014.

Still  positive  on  Medini…  Despite the property headwinds, the  company   remains  fairly  positive on phase 1 of its Medini project  (which  it  is  slated  for  launch  with an estimated GDV of  RM420m  by  end-2014),  given  its  cheaper  pricing  (RM750 psf,  vis-à-vis  RM1,300-1,500  psf  in  its  neighbourhood),  and the  exemption  in  foreign  restriction.   On  the  other  hand,  the acquisition  of  386,499  sq ft  leasehold land  in Shah Alam   (for RM29m)  is  expected  to  complete  by  4Q14,  and  Kim  Lun is currently  in  planning  stage to develop the land into bungalow units and targeting to launch the development  in 3Q15.

Outlook for manufacturing division remains bright…  The manufacturing  sector  had  outstanding  order  book  of ~RM270m  (as  at  end-1H14).  T he  manufacturing  division’s prospects  remain  positive,  thanks  to  the  Singapore government’s  target  to  double  its  rail  network  (from  178km currently to 360km by 2030)  and plans to develop  phase 2 of Deep  Tunnel  Sewerage  System  (with  construction  work expected to commence by 2016).

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 

• We  took  this  opportunity  to  cut  our  FY14  net profit forecast by  13.7%  to  RM37.2m,  largely  to  reflect  higher  effective  tax rate.

Rating  HOLD

• Despite  its  unexciting  earnings  outlook, we deem its current valuations  as  fair.   Hence,  we  are  maintaining  our  Hold  call on the stock.

Valuation 

• TP  cut  by  6.5%  to  RM1.44  based  on  10x  revised  average FY14-FY15  earnings.

Source: Hong Leong Investment Bank Research - 26 Sep 2014