Results

• Kimlun reported 3QFY16 results with revenue coming in at RM224.2m (-9% QoQ, -7% YoY) and earnings of RM16.5m (-32% QoQ, -16% YoY). Cumulative 9M earnings totalled RM57.7m, increasing +17% YoY.

Deviation

• 9M earnings made up 84% of our full year forecast (77% of consensus) which is above expectations.
• The stronger than expected results was attributed to the manufacturing division which enjoyed superior gross margins of 32% for the 9M period vs 24.8% last year. This was due to (i) stronger SGD against MYR and (ii) higher proportion of MRT deliveries last year which generally commands a lower margin.

Dividends

• None declared.

Highlights

• Orderbook remains healthy. Kimlun’s orderbook currently stands at RM2.1bn comprising RM1.8bn for construction and RM280m for manufacturing. Overall, this translates to a healthy cover ratio of 2x on FY15 revenue.
• Bags MRT2 TLS contract. Kimlun announced that it has been awarded a RM52.8m contract to supply tunnel lining segments (TLS) for the MRT2. The contract is expected to last until Sept 2019, slightly less than 3 years from now. This contract win is within our expectations as Kimlun was also one of the two TLS suppliers for the MRT1. Earlier in March, Kimlun also won a RM200m contract to supply segmental box girders (SBG) for the MRT2.
• Strong on job wins. YTD, Kimlun has managed to secure jobs in excess of RM1.3bn and is looking to add another RM200-300m for the remainder of the year. Looking ahead, potential job wins could stem from (i) the LRT3 where it has been prequalified for both the construction and precast roles, (ii) affordable housing under PR1MA and PP1AM in which it has already submitted some bids and (iii) the Central Spine Road. Kimlun has also successfully reduced its job flow dependency on Iskandar in view of the slowdown there..

Risks

• Slowdown in Iskandar could hamper job flow prospects.

Forecasts

• We raise FY16-18 earnings by 7%, 5% and 2% respectively as we impute higher margin assumptions for its manufacturing division. Rating Maintain BUY, TP: RM2.66
• We like Kimlun as a prudently run construction outfit with commendable results delivery. Share price has fallen 8% from its peak this month, offering a good opportunity to accumulate.

Valuation

• Following the earnings upgrade, our TP is raised from RM2.44 to RM2.66 based on an unchanged 11x P/E multiple (mean) applied to FY17 earnings.

Source: Hong Leong Investment Bank Research - 30 Nov 2016