Kimlun 2Q results were hit by lower construction margin mainly due to projects mix with higher composition of lower margin projects, namely Pan Borneo Sarawak project. We understand that construction margin will hover around similar level (9-10% GP margin as at 2Q) in 2H as lower margin projects continue to have higher contribution to revenue. Its outstanding construction orderbook now stands at RM1.7bn (2x cover ratio). 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 orderbook stands at RM400m (4.2x cover ratio). Maintain forecast but upgrade to BUY with unchanged TP of RM1.52, pegged to 8x FY19 earnings.

Kimlun Held An Investor’s Briefing Yesterday With the Following Key Takeaways:

Dampened by lower construction margin. Kimlun’s 2Q results were hit by lower construction margin mainly due to projects mix with higher composition of lower margin projects, namely Pan Borneo Sarawak project. We understand that construction margin will hover around similar level (9-10% GP margin as at 2Q) in 2H as lower margin projects continue to have higher contribution to revenue.

Construction. YTD Kimlun has secured new construction contracts with total value of RM400m. Its outstanding construction orderbook now stands at c.RM1.7bn, translating to 2.0x cover on FY17 construction revenue. Management’s FY18 orderbook replenishment target of RM600-800m remains intact with the balance expected to come from private sector property projects. However, we maintain our orderbook replenishment assumption of RM500m given the slowing in contract flows following the change in government.

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 RM163m. Its manufacturing orderbook stands at c.RM400m, implying 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. Maintained as the briefing yielded no major surprises.

Upgrade to BUY, TP: RM1.52. Upgrade to BUY with unchanged TP of RM1.52 pegged to 8x FY19 earnings. Valuations have turned attractive (FY18-19 P/E of 6.7x and 6.5x) following retracement of share price (-9.5%) post 2Q results. As such, we opine that gloomy prospects of construction segment have been reflected. Moreover, decent orderbook level from manufacturing segment is expected to stabilize the forward earnings.

Source: Hong Leong Investment Bank Research - 21 Sept 2018