Highlights

• Margins contract. Construction gross margin contracted slightly YoY from 6.1% to 5.7%. This was due to a larger proportion of work done on high rise building which involves the higher use of nominated subcontractors, yielding Kimlun a relatively lower margin. For the manufacturing division, gross margins contracted YoY from 18.2% to 16.1% due to higher contribution from the MRT which commands lower margins.

• Starting the year strong… YTD job wins have started out strong for Kimlun with RM422m in the bag. Its orderbook currently stands at RM1.4bn (RM1.2bn for construction and RM0.2bn for manufacturing), implying 1.2x cover on FY14 revenue.

• …but cautious on sustainability. Despite the strong job wins early this year for Kimlun, we are sceptical that this momentum can be sustained throughout the year. This is in view of the weak property market at Iskandar due to oversupply concerns. Developers at Iskandar have started to hold back on their launches which will impact potential job flows to Kimlun as it derives the bulk of its contract flows from the Johor region.

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

• While the results missed our forecast, we retain our FY15-16 numbers. This is in view that earnings will subsequently recover in the coming quarters once newer job wins start to contribute.

Rating

HOLD, TP: RM1.33

• While YTD job wins have started out on a promising note, the overall poor sentiment at Iskandar will likely cause investors to shy away from such plays.

Valuation

• Unchanged TP of RM1.33 based on 10x FY15 P/E target, slightly below its mean of 11x.

Source: Hong Leong Investment Bank Research - 27 Feb 2015