Progress in Pan Borneo Sarawak work package secured by Kimlun 30% owned JV is ongoing with completion rate of c.30%. The work is expected to expedite in the near term after resolving the utilities relocation issue. Its outstanding construction order book now stands at c.RM1.6bn, translating to 1.8x cover on FY17 construction revenue. Going forward we expect competition for private sector jobs to intensify as other contractors start bidding more aggressively within this space due to reduction in government spending on public infrastructure. For manufacturing division, outstanding order book stands at RM410m, represents 4.2x cover on FY17 manufacturing revenue. New manufacturing job wins going forward are mainly driven by the SGD2.3bn Deep Tunnel Sewerage Phase 2 project in Singapore. Maintain forecast and HOLD with unchanged TP of RM1.66 (8x FY18 earnings).

Pan Borneo Sarawak. Progress in Pan Borneo Sarawak work package secured by Kimlun 30% owned JV is ongoing with completion rate of c.30%. The work is expected to expedite in the near term after resolving the utilities relocation issue. We understand that the work package is less likely to be affected by cost review by the Federal government as the package was awarded through an open tender. Moreover, the package is unlikely to be shelved due to its strategic location that connects Kuching town.

Construction. Kimlun has secured 2 new construction contracts with total value of RM198m YTD. Its outstanding construction order book now stands at c.RM1.6bn (assuming burn rate of RM200m in 2Q18), translating to 1.8x cover on FY17 construction revenue. Management is targeting to secure another RM400-700m in new construction jobs for FY18. However, we maintain our order book replenishment assumption of RM500m given the slowing in contract flows following the change in government post GE14.

Cautious on job flows. Following the change in government post GE14, we have turned cautious on the overall macro job flow outlook for the construction sector. HSR and MRT3 have been shelved while terms of the ECRL are being renegotiated and LRT3 has been downsized due to review of mega projects. As a result, about RM105bn worth of local content of mega projects will be removed over the next 2 years based on our estimation. Although Kimlun is less involves with public infrastructure construction jobs relative to private sector jobs in the past, we reckon competition for private sector jobs will intensify going forward as other contractors start bidding more aggressively within this space.

Manufacturing. YTD Kimlun has secured new sales order for tunnel lining segments and pre-cast concrete building components amounted to SGD39m (c.RM117m). Its manufacturing order book stands at c.RM410m (assuming burn rate of RM30m in 2Q18), representing 4.2x cover on FY17 manufacturing revenue. Going forward, manufacturing job wins are likely to be driven by the Deep Tunnel Sewerage Phase 2 (SGD2.3bn) project in Singapore which has already been awarded to 5 main contractors that Kimlun will bid from to supply precast tunnel segments.

Forecast. Maintained as the meeting yielded no major surprises.

Maintain HOLD, TP: RM1.66. Maintain HOLD with unchanged TP of RM1.66. TP is pegged to 8x FY18 earnings. While valuations are turning attractive following the post GE14 sell off, we remain cautious on the slowing macro job flow outlook.

Source: Hong Leong Investment Bank Research - 9 Aug 2018