Results

• 3QFY14 results came in with revenue of RM 295m (+30% YoY, -5% QoQ) and PATMI of RM9m (+30% YoY, +21% QoQ).
• Cumulative 9M core PATMI (after stripping off RM11m gain on land disposal recorded in 1Q) amounted to RM25.1m, an increase of 10% YoY.

Deviation

• 9M PATMI made up 65% of our full year estimate (63% of consensus) which is below expectations. While 3Q earnings rebounded QoQ, inline with our expectations of a stronger 2H, the recovery was less than what we had envisaged.

Dividends

• None. Final dividend usually declared in 4Q (FY13: 3 sen).

Highlights

Lower margins. 9M gross margin for construction shrunk from 6.7% to 5.6% YoY due to higher proportion of subcontracting for its high rise building jobs. Manufacturing gross margins on the other hand, compressed from 17.4% to 15.3% due to larger contribution from the MRT components which have relatively lower margins. Its overall orderbook stands at RM1.5bn, implying 1.6x revenue cover.

Iskandar slowdown. Johor’s House Price Index contracted 1.6% in 2Q, the first decline in 27 months. There are concerns over an excess supply situation due to the entrance of Chinese developers flooding the market. Some 30k homes are expected to be completed by end 2016. With this, local developers are taking a more caut ious stance and holding back on launches. This is negative for Kimlun which mainly derives its contracts from developers in the region.

Property lacks excitement. Kimlun’s maiden property development, The Hyve in Cyberjaya (GDV: RM235m) has achieved 75% take up since its launch in Dec 2012. For its Opus Medini development (GDV: RM420m), we reckon that its initial launch target of end-2014 will be delayed due to the softening property market in Iskandar.

Risks

• Slowdown in Iskandar would hamper (i) construction division since Kimlun derives most of its jobs there and (ii) property division given the impending launch of Opus Medini.

Forecasts

• FY14-16 earnings cut by 3-5% as we impute lower margins due to higher subcontracting cost.

Rating

HOLD, TP: RM1.33

• We think the outlook will remain challenging for Kimlun amidst the slowdown in Iskandar. However, we believe this has been priced in with the 22% share price decline YTD. Maintain HOLD.

Valuation

• TP cut from RM1.38 to RM1.33 following the earnings downgrade. This is based on an unchanged 10x FY15 P/E target (mean: 11x)

Source: Hong Leong Investment Bank Research - 1 Dec 2014