1QFY18 earnings of RM13m (-48% QoQ, -18% YoY) were below our expectations and consensus. The disappointment was due to lower manufacturing margin resulting from higher fixed cost, lower margin product mix and stronger MYR vs SGD. On a brighter note, construction witnessed strong topline growth and margin expansion. However, looking forward, we turn cautious on the job flow outlook given the change in administration post GE14. Cut FY18-19 earnings by 14% and 15% respectively. Downgrade from Buy to HOLD with RM1.66 TP (8x FY18 earnings).

Results disappoint. Kimlun reported 1QFY18 results with revenue coming in at RM220.9m (-41% QoQ, +30% YoY) and earnings of RM12.6m (-48% QoQ, -18% YoY). 1Q earnings formed only 16% of ours and consensus full year forecast which is below expectations. The results disappointment mainly stemmed from margin compression for the manufacturing segment. No dividend was declared.

Construction delivers but... Construction witnessed healthy revenue growth of 33% YoY with gross margin expanding from 11.7% to 12.6%. Its construction orderbook of RM1.58bn implies 1.8x cover on FY17 construction revenue which is still considered healthy given the fast track nature of its jobs.

…cautious on job flow outlook. Following the change in government post GE14, we have turned cautious on the overall macro job flow outlook for the construction sector. The new administration has stated that it will put all mega projects under review to ensure that the terms are fair to the government and country. We feel that this will result to project award delays (as they are reviewed) or in the worst case, an outright cancellation.

Manufacturing margins hit. Despite the 28% YoY growth in manufacturing revenue, gross profit fell 72% as margin contracted from 32.4% to 7%. This was due to (i) higher fixed overhead cost coupled with slower deliveries for MRT2, (ii) higher contribution from quarry which has lower margin, (iii) product mix of lower margin and (iv) strengthening of MYR vs SGD in 1Q which impacted Singapore deliveries.

Forecast. We cut FY18-19 earnings by 14% and 15% as we impute lower manufacturing margin and lower construction orderbook replenishment given the uncertain job flow outlook

Downgrade to HOLD, TP: RM1.66. Apart from the earnings reduction, we lower our P/E target from 11x to 8x (lower end of its historical range) tagged to FY18 earnings. Our TP is reduced from RM2.65 to RM1.66. Downgrade from Buy to HOLD given the results shortfall coupled with an uncertain macro job flow outlook.

Source: Hong Leong Investment Bank Research - 31 May 2018