Highlights

• Pan Borneo award... Yesterday, we attended Kimlun’s investor’s briefing which was represented by its CEO, Mr Sim Tian Liang and CFO, Ms Vennessa Yam. Subsequently, it was announced that the 70:30 JV between Zecon (not - rated) and Kimlun was awarded a package of the Pan Borneo Highway (PBH) from the Serian roundabout to Pantu Junction worth RM1.46bn (Kimlun’s share: RM438m).

• ...providing the boost. This contract significantly boosts Kimlun’s orderbook by 47% to RM1.4bn, implying a cover ratio of 1.6x on FY15 construction revenue. Job wins have been strong YTD at RM711m, almost matching FY15 full year sum of RM750m. Management is targeting another RM300-500m in new job wins for the remainder of FY16.

• Countering the slowdown. Management highlights that the slowdown at Iskandar has impacted high rise buildings the hardest. To counter this, Kimlun is tapping on other segments such as affordable housing, factories and industrial buildings. This appears to be paying off with RM270m worth of building related jobs secured YTD.

• Hitting harder on infra. Kimlun has also started to tender more aggressively within the infra space, evidenced by its recent win of the PBH package. It has submitted its bid for the Central Spine Road (RM8bn) both as a main and subcontractor. Apart from that, it has also been invited by Prolintas to bid for the 8 work packages involving the DASH (RM4.2bn) and SUKE (RM4.3bn) highways. These highway packages have been excluded from management’s new jobs win target.

• Prequalified for MRT2. Kimlun has submitted its bid to supply segmental box girders (SBG) for the MRT2 while tenders for the tunnel lining segments (TLS) have yet to be called. For MRT1, Kimlun managed to secure 50% of the SBG (RM223m) and TLS (RM48m) requirements. We expect this to be no different for MRT2 as Kimlun’s plant in Senawang is strategically located for logistical reasons and has sufficient capacity.

Risks

• Iskandar slowdown hampering new job wins.

Forecasts

• YTD job wins of RM711m has surpassed our FY16 target of RM700m and we now raise this to RM1.2bn. This increases our FY16-17 earnings forecast by 3-9%.

Rating

• Upgrade to BUY, TP: RM2.23
• We were previously cautious on Kimlun’s outlook given the weak sentiment at Iskandar. However, with Kimlun successfully weathering through the slowdown, coupled with a more robust job flow outlook from other sources, we are turning upbeat and upgrade our rating from Hold to BUY.

Valuation

• Apart from our earnings upgrade, we also raise our P/E target from 8x to 11x (long term mean) on FY16 earnings to derive a higher TP of RM2.23 (from RM1.56).

Source: Hong Leong Investment Bank Research - 11 Mar 2016