Results

• Kimlun reported 4QFY15 results with revenue coming in at RM232m (-16% YoY, -4% QoQ) and earnings of RM21m (+132% YoY, +9% QoQ).

• Full year FY15 core earnings amounted to RM64m, a strong 84% YoY jump. Apart from removing forex impact (RM6m this year), we also strip off land disposal gains in FY14 (RM11m) to derive core numbers.

Deviation

• FY15 core earnings were above expectations, surpassing our forecast by 13% (consensus by 11%).

• Although revenue was inline with our forecast (accounting for 98%), the positive surprise stemmed from margin expansion. Construction gross margins expanded YoY from 5.7% to 8.3% due to execution of better margin projects that have lower subcontracting and lower material prices. Manufacturing gross margins also expanded from 16% to 27.3% YoY. This was due to (i) lower margin base last year due to the MRT, (ii) appreciation of the SGD this year and (iii) execution of higher margin orders.

Dividends

• Final dividend of 5.8 sen was declared (FY14: 3.8 sen).

Highlights

• Concerns on thinning orderbook. While the results were certainly strong, we are cautious on its current orderbook level which stands at RM1.1bn (construction: RM950m, manufacturing: RM170m), implying a thin cover ratio of 1.1x on FY15 revenue. Unless new job wins come in significantly, growth potential is likely to be muted.

• Waiting for MRT2. Kimlun has been prequalified for the MRT2 to supply segmental box girders (SBG) and tunnel lining segments (TLS). 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

• While it is tempting to upgrade earnings on back of strong results, we find it tough to envisage much growth potential after taking into account its thin orderbook backlog. As such, we keep our earnings unchanged pending the takeaways from its investor’s briefing on 10 March.

Rating

Downgrade to HOLD, TP: RM1.56

While Kimlun’s results have performed well this year, growth potential from here on remains rather muted, as previously explained. With share price approaching our TP, we downgrade our rating from Buy to HOLD.

Valuation

• TP of RM1.56 based on 8x FY16 P/E, a discount to its mean of 11x due to weak sentiment for Iskandar related plays.

Source: Hong Leong Investment Bank Research - 29 Feb 2016