Kimlun has secured a RM164m contract for construction of apartments and commercial building at Medini Iskandar. With the latest job win, orderbook is now estimated at RM1.9bn (cover ratio of 2.2x). We remain cautious on the macro job flow outlook following the new government’s review on mega projects. Increase FY19-20 by 3.7% and 4.2% respectively as YTD job win exceeded our orderbook replenishment assumption. We adjust our orderbook replenishment assumption to RM600m which is at the lower end of management guidance (RM600m-800m) as we prefer to be more conservative due to gloomy industry prospect. Maintain BUY rating with higher TP of RM1.58 (from RM1.52) after earnings forecast adjustment. TP is pegged to 8x P/E multiple to FY19 earnings. Valuations have turned attractive (FY18-19 P/E of 6.3x and 5.8x) following retracement of share price post 2Q results.

NEWSBREAK

Medini building contract. Kimlun announced that it has been awarded RM164m contract from Sunway Iskandar Sdn Bhd for the construction of 1 block of commercial building and 1 block of apartments at Medini Iskandar, Johor. The work is expected to be completed by end of June 2021.

HLIB’s VIEW

Exceed our orderbook assumption. This construction job win brings the YTD sum to RM564m which has exceed our FY18 orderbook replenishment assumption of RM500m. Kimlun’s orderbook currently stands at c.RM1.9bn which translates to 2.2x cover on FY17 construction revenue.

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. 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.

Forecast. Increase FY19-20 by 3.7% and 4.2% respectively as YTD job win exceeded our orderbook replenishment assumption. We adjust our orderbook replenishment assumption to RM600m which is at the lower end of management guidance (RM600m-800m) as we prefer to remain conservative due to gloomy industry prospect.

Maintain BUY, TP: RM1.58. Maintain BUY rating with higher TP of RM1.58 (from RM1.52) after earnings forecast adjustment. TP is pegged to 8x P/E multiple to FY19 earnings. Valuations have turned attractive (FY18-19 P/E of 6.3x and 5.8x) following retracement of share price post 2Q results. As such, we opine that gloomy prospects of construction segment have been adequately reflected. Moreover, decent orderbook level from manufacturing segment is expected to stabilize its earnings going forward.

Source: Hong Leong Investment Bank Research - 31 Oct 2018