Highlights

• Hosted investor’s briefing. Yesterday, we attended Kimlun’s investor 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 30 fund managers and analysts.

• Earnings declined in FY17. To recap, Kimlun posted FY17 earnings of RM69m, declining 16% YoY. This was mainly due to the YoY fall in manufacturing revenue and GP by 35% and 52% resulting from the timing gap between completed Singapore deliveries (SMRT and sewerage tunnel) and commencement of the MRT2. Management guided that production for MRT2 should ramp up in FY18.

• Orderbook at the high side. Kimlun’s orderbook stood at RM2.1bn as of end FY17 comprising RM1.79bn for construction and RM340m for manufacturing. This implies a cover of 2.1x on FY17 revenue which is healthy considering the fast turnaround nature of its jobs.

• Job flow pipeline. For FY18, management is gunning for RM600-900m in new construction jobs and RM100-120m for manufacturing. Its targeted construction jobs comprise mainly of affordable housing in the Klang Valley and Johor where it will leverage on its IBS expertise. This target could potentially be surpassed if it manages to secure a slice (via both construction and manufacturing) of mega rail jobs such as the HSR and RTS which will pass thru its stronghold market in Johor. Kimlun is also in talks with the YTL led consortium to participate in the Southern Double Track. In Singapore, manufacturing job wins are likely to be driven by the Deep Tunnel Sewerage Phase 2 (SGD2.3bn) which has already been awarded to 5 main contractors that Kimlun will bid from to supply precast tunnel segments.

• Aggressive land banking. Since Dec 2017, Kimlun has proposed to acquire 3 parcels of land in Johor and 1 in Shah Alam from 3 developers for a total consideration of RM186.5m. On a proforma basis, the landbanking exercise would increase its net gearing from 7% (4QFY17) to 38%. However, we note that the actual net gearing increase may not be immediate as 3 out of the 4 acquisitions are only expected to be concluded in 2020. The exact development plans of the said lands are still sketchy at this juncture.

Risks

• Iskandar slowdown hampering new job wins.

Forecasts

• Unchanged. Management expects a recovery in FY18 earnings which is in line with our forecast.

Rating

Maintain BUY, TP: RM2.65

• We expect FY18 to be an earnings recovery year for Kimlun. It should also benefit from a slice of the mega rail projects that pass thru its stronghold market in Johor.

Valuation

• Our unchanged TP of RM2.65 is based on 11x P/E tagged to FY18 earnings.

Source: Hong Leong Investment Bank Research - 14 Mar 2018