Results

• Kimlun reported 2QFY15 results with revenue of RM258.5m (-16% YoY, -20% QoQ) and core earnings of RM15.6m (+104% YoY, +10% QoQ).

• Cumulative 1H core earnings amounted to RM29.7m (+87% YoY). Note that we have removed RM10.8m in land disposal gains to derive last year’s core earnings.

Deviation

• 1H core earnings made up 70% of our full year forecast (65% of consensus) which is above expectations.

• The stronger than expected results stemmed from margin expansion as higher margin jobs were executed. 1H gross margins for construction and manufacturing stood at 7.5% and 24.3% respectively vs. 5.7% and 14.6% in the same period last year.

Dividends

• None. Usually declared in 4Q.

Highlights

• Job wins adding up but orderbook still thin. Kimlun has managed to secure RM650m worth of new jobs YTD (RM550m for construction and RM100m for manufacturing). While job wins have been strong, its orderbook level remains thin at RM1.4bn, implying 1.1x cover on FY14 revenue. Unless job wins can continue accelerating further, it will be difficult to propel growth beyond FY15.

• Surviving well in tough times. Despite the property slowdown in Iskandar, Kimlun has amazingly been able to replenish its orderbook well. Management guides that it is shifting its focus away from the residential segment (which has been hit by the slowdown) towards industrial buildings and factories. For the manufacturing segment, the key catalyst would be the roll out of MRT2 (in 1Q16) via the supply of segmental box girders and tunnel lining segments.

Risks

• Slowdown in Iskandar would hamper job flow prospects.

Forecasts

• Admittedly, our previous forecast may have been too conservative. As such, we raise FY15-17 earnings by 19%, 29% and 40% respectively as we impute higher margins and stronger job wins.
• Despite our upgrade, we project flattish earnings beyond FY15. While job wins have been strong this year, this merely makes up for the lacklustre wins last year.

Rating

• Upgrade to BUY, TP: RM1.40
• While earnings growth remains muted beyond FY15, Kimlun now trades at an undemanding 6-6.5x FY15-17 P/E following the recent share price fall. This warrants us to upgrade our rating to BUY (from Hold) on valuation grounds.

Valuation

• Our TP is raised only slightly from RM1.38 to RM1.40 despite the earnings upgrade as it is offset by our P/E multiple cut from 10x to 8x, reflecting the weak sentiment for Iskandar related plays.

Source: Hong Leong Investment Bank Research - 28 Aug 2015