Kimlun’s 9MFY18 earnings of RM38.2m (-14% YoY) were within both our and consensus expectations. YTD core PATAMI decreased by 14% due to lower construction and precast concrete products margins. Kimlun has secured new construction contracts with total value of RM564m YTD. Its outstanding construction orderbook now stands at RM1.8bn, translating to 2.0x cover on FY17 construction revenue. Maintain forecast and BUY rating with unchanged TP of RM1.52 pegged to 8x FY19 earnings. Valuations turned attractive following retracement of share price (-14.6%) post 2Q results and as such we opine that gloomy prospects of construction segment is reflected. Moreover, decent orderbook level from manufacturing segment is expected to stabilize the forward earnings.

Within expectations. Kimlun reported 3QFY18 results with revenue of RM262.4m (+20% QoQ, +6% YoY) and core earnings of RM15.7m (+60% QoQ, +11% YoY). This brings 9MFY18 core earnings to RM38.2m, decreasing by 14% YoY. 9M core earnings accounted for 65% of our and 64% consensus forecast respectively. We deem this in line with our expectation as 4Q traditionally the strongest quarter in the year.

QoQ. Core PATAMI increased by 60% mainly due to stronger performance from both construction and manufacturing segment as higher revenue was generated from Pan Borneo Sarawak project, MRT2 sales orders and an IBS components sales order.

YoY. Core PATAMI increased by 11% mainly due to lower selling and administrative expenses, partially offset by lower margin achieved by both construction and manufacturing divisions.

YTD. Core PATAMI decreased by 14% mainly due to lower construction and precast concrete products margins. The drop in margin is mainly due to projects mix with higher composition of lower margin projects, larger proportion of precast revenue was contributed by lower margins supply contracts and sales of lower margin quarry products.

Construction. Kimlun has secured new construction contracts with total value of RM564m YTD. Its outstanding construction orderbook now stands at RM1.8bn, translating to 2.0x cover on FY17 construction revenue.

Manufacturing. YTD Kimlun has secured new sales order for tunnel lining segments and pre-cast concrete building components amounting to RM163m. Its manufacturing orderbook stands at RM400m, representing 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. Maintain as we deem the results inline.

Maintain BUY, TP: RM1.58. Maintain BUY rating with unchanged TP of RM1.58. TP is pegged to 8x FY19 earnings. Valuations turned attractive following retracement of share price (-14.6%) post 2Q results and as such we opine that gloomy prospects of construction segment is reflected. Moreover, decent orderbook level from manufacturing segment is expected to stabilize the forward earnings.

Source: Hong Leong Investment Bank Research - 30 Nov 2018