Results

• Kimlun reported 3QFY17 results with revenue of RM248.1m (+27% QoQ, +11% YoY) and earnings of RM14.2m (-4% QoQ, -14% YoY).

• Cumulative 9M revenue totalled RM613.1m (-13% YoY) with earnings at RM44.4m (-23% YoY).

Deviation

• 9M earnings made up 65% and 64% of ours and consensus forecast which we regard to be below expectations. The variance against our forecast was due to higher operating expense resulting from RM5.9m provision for doubtful debts.

Dividends

• None declared.

Highlights

• Flat construction topline but better margin. Despite 9M construction revenue declining 5% YoY, gross profit rose 13%. Gross margin expanded from 10.5% to 12.5% from the recognition of job mix with better margin.

• Manufacturing continues to face timing gap. For the 9M period, manufacturing revenue and gross profit fell 45% and 57% 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 remains healthy. Kimlun’s total orderbook stands at RM2.4bn comprising RM2.05bn for construction and RM350m for manufacturing. This translates to an overall cover of 2.6x on FY16 revenue. YTD total job wins have also been strong at RM1bn (FY16: RM1.6bn), surpassing its full year guidance of RM600-700m.

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 FY17-19 earnings downwards by 6%, 2% and 1% respectively after imputing an overall higher cost structure and slower progress recognition on the Pan Borneo Highway job.

Rating

Maintain BUY, TP: RM2.65

• Although we forecast earnings to decline by 22% this year, we are positive on a recovery in FY18 (+20%) underpinned by its strong job wins leading to a record high orderbook.

Valuation

• Following the earnings cut, our TP is reduced from RM2.70 to RM2.65 which is still based on 11x FY18 earnings (mean: 12x).

Source: Hong Leong Investment Bank Research - 30 Nov 2017