Highlights

• Investor’s briefing. Last Friday, Kimlun hosted its bi-annual briefing post 1HFY15 results (released in Aug). To recap, 1H core earnings of RM30m was up 87% YoY primarily due to margin expansion from the contribution of newer jobs.

• Surging from a low base. Kimlun’s construction job wins have picked up strongly with RM662m secured YTD compared to only RM270m in FY14. Its orderbook stands at RM1.4bn which implies a rather thin cover ratio of 1.1x on FY14 revenue (peers average: 2.7x).

• Hit by Iskandar but… Despite decent job wins YTD, we remain cautious given the slowdown at Iskandar as developers scale back on property launches. This has negative ramifications on Kimlun as it derives the bulk of its contracts from property developers in Johor.

• …tapping other avenues. To counter the weak sentiment at Iskandar, Kimlun is tapping on other segments such as (i) factories and industrial buildings; (ii) infra works (RM1bn tenders submitted); (iii) affordable housing; and (iv) building jobs in Selangor. Management also shared that it is pursuing for a slice of the RAPID pie where it has bid for RM500m worth of infra works. It is also tendering for some of the subcontract works from the main EPCC contractors.

• Ready for MRT Line 2. Kimlun is currently undergoing prequalification for the MRT Line 2 to supply segmental box girders (SBG) and tunnel lining segments (TLS). Tenders are expected to be called next month. For Line 1, Kimlun managed to secure 50% of the SBG (RM223m) and TLS (RM48m) requirements. We expect this to be no different for Line 2 as Kimlun’s plant in Senawang is strategically located for logistical reasons and has sufficient capacity.

• Slow property sales. Kimlun’s development, The Hyve in Cyberjaya (GDV: RM235m, 50% stake) has achieved 80% take up rate compared to 70% a year ago. Its Taman Puteri development (GDV: RM48m) comprising landed homes in Pontian, Johor has seen 20% reservations since March.

Risks

• Iskandar slowdown would hamper orderbook replenishment potential.

Forecasts

• Unchanged as we feel there were no material briefing takeaways that would warrant a revision in our earnings.

Rating

BUY TP: RM1.40

• We retain our BUY rating on Kimlun purely on valuation grounds as it trades at an undemanding 7.2x and 7x P/E on FY15-16 earnings respectively.

Valuation

• Our unchanged TP of RM1.40 is based on 8x FY16 earnings, which is at a discount to its mean of 11x. We reckon that this discount is justified to reflect the weak sentiment at Iskandar.

Source: Hong Leong Investment Bank Research - 5 Oct 2015