Results

• Kimlun reported 4QFY16 results with revenue coming in at RM235.4m (+5% QoQ, +1% YoY) and earnings of RM24.2m (+46% QoQ, +13% YoY).
• Full year FY16 earnings summed to RM81.9m (+16% YoY), making this the strongest profits achieved.

Deviation

• FY16 earnings were above expectations, surpassing our earnings estimate by 11% and consensus by 8%.
• The stronger than expected results were attributed to the construction division in 4Q which experienced both topline growth (+10% QoQ, +13% YoY) and margin expansion with gross level at 17.6% (3QFY16: 10.4% and 4QFY15: 9.3%). This was due (i) new jobs kicking in and (ii) recognition of some lumpy variation orders (VOs) which were approved.

Dividends

• Final dividend of 6.5 sen was declared (FY15: 5.8 sen).

Highlights

• Orderbook at decent level. Kimlun’s orderbook currently stands at RM1.9bn, comprising RM1.7bn for construction and RM260m for manufacturing. This translates to a cover ratio of 2.1x on FY16 revenue which is decent considering the fast turnaround nature of its contracts.
• Job wins came strongly. We gather that Kimlun has managed to secure RM1.3-1.5bn worth of jobs in FY16 (FY15: RM750m). 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

• Downward margin trend for the manufacturing division once deliveries for the MRT2 kicks in as these contracts generally command lower margins.

Forecasts

• While the results were above expectations, we keep our forecast unchanged. Given the high base achieved in FY16, FY17 earnings are expected to contract by -9% YoY as (i) current orderbook level is insufficient to generate growth and (ii) risk of margin downtrend for manufacturing once the MRT2 deliveries kick in.
• An analyst briefing will be held sometime in mid-March where we will gather more updates.?

Rating

Maintain BUY, TP: RM2.66

• We like Kimlun as a prudently run construction outfit with commendable results delivery and a growing avenue of job sources after successfully diversifying away from Iskandar.

Valuation

• Unchanged TP of RM2.66 is based on 11x P/E multiple ascribed to FY17 earnings.

Source: Hong Leong Investment Bank Research - 28 Feb 2017