Results

• Kimlun reported 2QFY16 results, displaying revenue of RM246.4m (-5% YoY, +5% QoQ) and earnings of RM24.1m (+55% YoY, +41% QoQ).

• Cumulative 1H earnings of RM41.2m increased +39% YoY.

Deviation

• 1H earnings made up 70% of our full year forecast (66% of consensus) which is above expectations.

• The strong results were largely due to superior performance of the manufacturing division which enjoyed both topline growth of +26% YoY and +25% QoQ as well as margin expansion with gross level at 34.6% (2QFY15: 24.5%, 1QFY16: 32.1%).

• Manufacturing revenue was driven by higher volume of IBS products for RAPID related projects while margin expansion resulted from economies of scale given higher production.

Dividends

• None declared.

Highlights

• Sitting on a healthy orderbook. Kimlun’s orderbook currently stands at RM2.2bn which consists of RM1.9bn for construction and RM300m for manufacturing. Overall, this implies a rather healthy cover ratio of 2.1x on FY15 construction revenue.

• Tapping on other segments. In view of the soft property market at Iskandar, Kimlun is tapping on other segments such as affordable housing, factories, industrial lots and jobs within the Klang Valley. It has also placed an increased focus on infra related jobs as evident by its Pan Borneo Highway (RM438m) secured in 1Q16 and is also eyeing on another major highway, the Central Spine Road (RM8bn).

• Waiting for MRT2 TLS contract. Having supplied tunnel lining segments (TLS) for the MRT1, we reckon that Kimlun stands as a top contender to return for MRT2. Based on the pricing for former, the TLS contract for the latter should be worth at least RM70m, potentially boosting its manufacturing orderbook by another 23% to RM370m.

Risks

• Slowdown in Iskandar could hamper job flow prospects.

Forecasts

• We raise our FY16-17 earnings forecast by 17% and FY18 by 2% after incorporating stronger than anticipated margins for manufacturing.

Rating

• Maintain BUY, TP: RM2.44

• Kimlun is a prudently run construction outfit that has managed to successfully reduce its dependency on the Iskandar property market. It is also a prime beneficiary of the MRT2 rollout via the supply of SBG and TLS.

Valuation

• Following the earnings upgrade, our TP is raised from RM2.15 to RM2.44 based on an unchanged 11x P/E multiple (mean) applied to FY16 earnings.

Source: Hong Leong Investment Bank Research - 30 Aug 2016