Results

• Kimlun reported 3QFY15 results with revenue of RM241.1m (-17% YoY, -7% QoQ) and earnings of RM19.6m (+124% YoY, +26% QoQ).

• Cumulative 9M core earnings (ex. forex) stood at RM44.5m, increasing strongly by 71% YoY. Note that apart from the removal of forex impact, we have also stripped off land disposal gains in FY14 (RM10.8m) to derive core numbers.

Deviation

• 9M core earnings made up 88% of our full year forecast (90% of consensus) which is above expectations.

• The stronger than expected results stemmed from margin expansion. Construction gross margins expanded YoY from 5.6% to 8% resulting from the execution of higher margin jobs that have lower subcontracting. Manufacturing margins improved significantly from 15.3% to 24.8% as (i) the MRT concrete products, which were largely executed last year carried lower margins, and (ii) appreciation of the SGD this year helped on its Singapore deliveries.

Dividends

• None. Usually declared in 4Q.

Highlights

• Orderbook level is thin. While the results were certainly strong, we are cautious on its current orderbook level which stands at RM1.1bn. This implies a cover ratio of 0.9x on FY14 revenue and 1.1x on FY15 projected revenue. Unless new job wins come in significantly, it is tough to envision much growth going forward.

• Waiting 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.

Risks

• Slowdown in Iskandar would hamper job flow prospects.

Forecasts

• We raise FY15-17 earnings by 9-12% as we impute higher margins.

Rating

• Maintain BUY, TP: RM1.56
• While Kimlun’s results have performed well this year, growth potential from here on remains rather muted, judging from its thin orderbook. Nonetheless, at 6.8x and 6.6x FY15-16 P/E, valuations are attractive enough to warrant a BUY rating.

Valuation

• Following our earnings upgrade, our TP is raised from RM1.40 to RM1.56 based on an unchanged 8x target P/E.

Source: Hong Leong Investment Bank Research - 27 Nov 2015