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 50 fund managers and analysts.
• Earnings decline this year. To recap, Kimlun posted 1HFY17 earnings of RM30m, declining 27% YoY. This was mainly due to the fall in manufacturing revenue by 55% YoY resulting from the timing gap between completed Singapore deliveries (SMRT and sewerage tunnel) and commencement of the MRT2. Manufacturing GP margin also contracted from 33.5% to 27.3% as the production mix shifted away from Singapore deliveries to Malaysia. Management guides that production for the MRT2 should ramp up in 4Q17.
• Orderbook at a high. Kimlun’s orderbook stood at RM2.3bn as of mid-2017 comprising RM2bn for construction and RM320m for manufacturing. This implies a cover of 2.5x on FY16 revenue which is rather strong considering the relatively fast turnaround nature of its jobs. YTD total job wins have also been strong at RM1bn (FY16: RM1.6bn), surpassing its full year guidance of RM600-700m. This includes yesterday’s announced RM50m contract for a connecting road to the Senai Desaru Expressway.
• Out of the LRT3 race. Management shared that it is no longer in the running for the LRT3 where it had previously bid for 2 packages. However, Kimlun intends to participate on the manufacturing side via the supply of segmental box girders and other precast products.
• Upbeat on job flows. Management is upbeat on its job flow prospects post 14 th General Elections (14GE) which we expect to be held in March 2018. It anticipates the roll out of mega rail projects such as the ECRL and HSR after the polls where Kimlun intends to participate on both the construction and manufacturing front. Apart from that, it also aims to secure RM500m in affordable housing jobs by leveraging on its IBS expertise.

Risks

• Iskandar slowdown hampering new job wins.

Forecasts

• No change to earnings forecast as this has already been adjusted post 2Q results (in Aug).

Rating

• Upgrade to BUY, TP: RM2.70
• Although we forecast earnings to decline by 16% this year, we are positive on a recovery in FY18 underpinned by its strong job wins leading to a record high orderbook. With better clarity on its potential earnings recovery next year, we upgrade our rating from Hold to BUY.

Valuation

• While there is no change to our earnings forecast, we roll over our valuation horizon from mid-FY18 to end-FY18. We also raise our P/E target from 10x to 11x, inline with its long term mean. All in all, our TP is raised from RM2.30 to RM2.70

Source: Hong Leong Investment Bank Research - 29 Sep 2017