Results

• Kimlun reported 1QFY17 results with revenue of RM170.2m (-28% QoQ, -28% YoY) and earnings of RM15.4m (-36% QoQ, -10% YoY).

Deviation

• 1Q earnings accounted for 22% of our full year forecast (consensus: 21%) which we deem to be inline as we expect subsequent quarters to be stronger.

Dividends

• None declared.

Highlights

• Timing gap impacts construction... Construction revenue fell -28% QoQ and -22% YoY attributed to timing differences between completed projects and the commencement of newer ones. Gross margin of 11.7% expanded slightly YoY from 10.7% but contracted QoQ from 17.6% (boost from recognition of variation orders).
• ...and manufacturing as well. The manufacturing segment also saw revenue decline by -28% QoQ and -48% YoY. This was due to the completion of several Singapore deliveries in FY16 which was not offset by the MRT2 which will only gain traction at the later part of FY17. Gross margin however, remained healthy at 32.4% vs 25% in 4QFY16 and 32.1% in 1QFY16.
• Sits on a decent orderbook. Kimlun’s orderbook currently stands at RM1.9bn, comprising RM1.6bn for construction and RM330m for manufacturing. This implies an overall cover ratio of 2x on FY16 revenue which is rather healthy considering the fast turnaround nature of its contracts. 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.

Risks

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

Forecasts

• No changes as the results were inline.

Rating .

Maintain HOLD, TP: RM2.42

• While we like Kimlun as a prudently run construction outfit, we retain our HOLD rating on the stock in view of a potential earnings decline this year (-14% YoY).

Valuation

• Although there are no changes to our earnings forecast, we raise our TP marginally from RM2.27 to RM2.42 as we roll forward our valuation horizon from FY17 to mid-FY18 at an unchanged P/E multiple of 10x.

Source: Hong Leong Investment Bank Research - 31 May 2017