Results

• Kimlun reported 2QFY17 results with revenue of RM194.8m (+14% QoQ, -21% YoY) and earnings of RM14.8m (-4% QoQ, -39% YoY).
• Cumulative 1H revenue totalled RM365m (-24% YoY) with earnings at RM30.2m (-27% YoY).

Deviation

• 1H earnings accounted for 43% and 42% of ours and consensus forecast which we regard to be slightly below expectations. This was due to lower than expected deliveries for the manufacturing segment.

Dividends

• None declared.

Highlights

• Construction delivers better margin. 1H construction revenue declined 16% YoY as newer larger sized projects remain at the early stage of the cycle. Gross profit fell by a smaller magnitude of 2% YoY thanks to margin recovery from 10.5% to 12.5% as a result of the overall project mix carrying better margins.
• Timing gap for manufacturing delivery. Manufacturing revenue and gross profit in 1H fell 55% and 63% YoY. This was due to the timing gap between completion of deliveries for jobs in Singapore (underground power transmission and SMRT Thompson line) and commencement of that for the KV MRT2 in Malaysia.
• Orderbook at healthy level. Kimlun’s total orderbook stands at RM2.3bn comprising RM2bn for construction and RM320m for manufacturing. This translates to an overall cover of 2.5x on FY16 revenue. 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 tendered 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

• We revise FY17 earnings downwards slightly by 3% after scaling back revenue for manufacturing.

Rating

Maintain HOLD, TP: RM2.30

• While we like Kimlun as a prudently run construction outfit, we retain our HOLD rating on the stock in view of its earnings decline this year (-16% YoY).

Valuation

• Following the earnings cut, our TP is reduced from RM2.42 to RM2.30. This is based on an unchanged 10x P/E target (mean: 11x) on mid-FY18 earnings.

Source: Hong Leong Investment Bank Research - 30 Aug 2017