Highlights

• Hosts investor?s briefing. Yesterday, we attended Kimlun?s investor?s briefing which was represented by its CEO, Mr Sim Tian Liang and CFO, Ms Vennessa Yam. The meeting was well attended with a crowd of around 80 fund managers and analysts.
• FY16 was a record year. To recap, Kimlun posted record earnings for FY16 at RM81.9m (+16 YoY). The strong showing was attributed to YoY margin expansion for both construction (recognition of variation orders (VOs)) and manufacturing (more Singapore deliveries as opposed to MRT1 which had lower margins).
• Orderbook remains healthy. Kimlun?s orderbook currently stands at RM1.9bn, comprising RM1.7bn for construction and RM260m for manufacturing. This translates to an overall cover of 2.1x on FY16 revenue which is healthy considering the relatively fast turnaround nature of its jobs.
• Widening its scope. In view of the soft property market, Kimlun will focus more on (i) non-residential jobs such as hospitals, malls, education facilities and religious buildings and (ii) infra based projects (e.g. highways and RAPID). It will continue to further reduce its dependency on Iskandar Malaysia for jobs given the soft property market there. Overall, management is comfortable to achieve new job wins of RM600-700m for FY17. However, this could surprise on the upside should Kimlun manage to secure chunky jobs such as the LRT3 where it has been invited to bid for 2 viaduct packages.
• Timing gap for manufacturing. For the MRT2, production of segmental box girders (SBG) has commenced while tunnel lining segments (TLS) will begin in 2Q17. As production for the MRT2 is still in the early stage, this may be insufficient to make up for the SMRT Thompson Line in which deliveries are hitting its tail end. To help make up for this, Kimlun is actively bidding for other IBS orders and jacking pipes in Singapore.

Risks

• Iskandar slowdown hampering new job wins.

Forecasts

• We cut FY17-18 earnings by -6% and -4% respectively after imputing normalisation of construction margins and potential timing gap for manufacturing. Rating Downgrade to HOLD, TP: RM2.27
• While FY16 was a record year, we expect earnings to decline by -14% in FY17 driven by the abovementioned factors. In view of this, we cut our rating on Kimlun from Buy to HOLD.

Valuation

• Apart from our earnings forecast cut, we ascribe a slightly lower P/E target of 10x (from 11x) in view of the potential earnings decline. Our TP is reduced from RM2.66 to RM2.27.

Source: Hong Leong Investment Bank Research - 10 Mar 2017