Kimlun’s 1HFY18 earnings of RM22.5m (-26% YoY) were below both our and consensus expectations due to lower than expected construction margin and higher than expected finance costs. YTD core PATAMI decreased by 26% due to lower construction and precast concrete products margins. Kimlun has secured 2 new construction contracts with total value of RM198m YTD. Its outstanding construction order book now stands at RM1.7bn, translating to 1.9x cover on FY17 construction revenue. Cut both FY18-19 earnings forecast by 11.5% respectively after taking into account lower construction margin and higher finance costs. We introduce FY20 earnings of RM53.4m. Maintain HOLD rating with lower TP of RM1.52 (from RM1.66) following earnings cut but slightly offset by the roll forward of valuation horizon from FY18 to FY19. TP is pegged to 8x PE multiple.

Below expectations. Kimlun reported 2QFY18 results with revenue of RM218.0m (- 1% QoQ, +12% YoY) and core earnings of RM9.8m (-22% QoQ, -33% YoY). This brings 1HFY18 core earnings to RM22.5m, decreasing by 26% YoY. 1H core earnings accounted for 34% of our and 33% consensus forecast respectively which is below expectation. This is mainly due to lower than expected construction margin and higher than expected finance costs.

QoQ. Core PATAMI decreased by 22% mainly due to lower construction margin attributable to projects mix with higher composition of lower margin projects, partially offset by better margin in manufacturing division due to higher mix of better margin precast concrete products.

YoY/ YTD. YoY and YTD core PATAMI decreased by 33% and 26% respectively mainly due to lower construction and precast concrete products margins.

Construction. Kimlun has secured 2 new construction contracts with total value of RM198m YTD. Its outstanding construction orderbook now stands at RM1.7bn, translating to 1.9x 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.

Manufacturing. YTD Kimlun has secured new sales order for tunnel lining segments and pre-cast concrete building components amounting to SGD39m (c.RM117m). Its manufacturing order book stands at RM400m, represents c.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. Cut both FY18-19 earnings forecast by 11.5% respectively after taking into account lower construction margin and higher finance costs. We introduce FY20 earnings of RM53.4m.

Maintain HOLD, TP: RM1.52. Maintain HOLD rating with lower TP of RM1.52 (from RM1.66) following earnings cut but slightly offset by the roll forward of valuation horizon from FY18 to FY19. TP is pegged to 8x PE multiple. 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 - 30 Aug 2018