Kimlun reported 1QFY19 core PATAMI of RM15.9m (-31% QoQ, +26% YoY) which were within both ours and consensus estimates. Kimlun has secured new construction contracts with total value of RM204m YTD. Its outstanding construction orderbook now stands at RM1.7bn, translating to a healthy cover ratio of 2.1x to FY18 construction revenue. We expect Kimlun to be one of the beneficiaries of Sarawak’s robust development expenditure due to its established footprint in the state as one of the work package contractor in Pan Borneo Sarawak. Kimlun’s manufacturing orderbook stands at RM300m, representing c.1.5x cover on FY18 manufacturing revenue. FY19 manufacturing job wins are expected to be in the range of RM80-120m. Maintain forecast. Introduce FY21 earnings forecast of RM55.6m. Maintain BUY rating with unchanged TP of RM1.58. TP is pegged to 8x FY19 earnings. We like Kimlun for its execution capability and undemanding valuations.

Within expectations. Kimlun reported 1QFY19 results with revenue of RM318.6m (+3% QoQ, +44% YoY) and core PATAMI of RM15.9m (-31% QoQ, +26% YoY). The core PATAMI accounted for 25% of our full year forecast (consensus: 26%), within both HLIB and consensus estimates.

QoQ. Core PATAMI decreased by 31% due to lower gross profit as preceding quarter benefited from cost savings from value engineering carried on certain projects.

YoY. Core PATAMI increased by 26% mainly due to higher contribution from manufacturing division.

Construction. Kimlun has secured new construction contracts with total value of RM204m YTD. Its outstanding construction orderbook now stands at RM1.7bn, translating to a healthy cover ratio of 2.1x to FY18 construction revenue. Management’s FY19 orderbook replenishment target of RM600-800m remains intact and future jobs bidding will be focused on affordable housing development.

Prospects in Sarawak. We expect Kimlun to be one of the beneficiaries of Sarawak’s robust development expenditure due to its established footprint in the state as one of the work package contractor in Pan Borneo Sarawak project. Sarawak state government has allocated c.RM9bn for development expenditure under state budget 2019 which is the biggest in the history of the state. Funding for those projects are expected to come from Sarawak’s state reserves (c.RM30bn) which may insulate the projects from risk of reduction of federal government spending.

Manufacturing. Kimlun’s manufacturing orderbook stands at RM300m, representing c.1.5x cover on FY18 manufacturing revenue. FY19 manufacturing job wins are expected to be in the range of RM80-120m. Going forward, manufacturing job wins are likely to be driven by the extension of Singapore MRT rail network and North South Corridor Expressway.

Forecast. Maintain as the results inline. Introduce FY21 earnings forecast of RM55.6m

Maintain BUY, TP: RM1.58. Maintain BUY rating with unchanged TP of RM1.58. TP is pegged to 8x FY19 earnings. We like Kimlun for its execution capability and undemanding valuations.

Source: Hong Leong Investment Bank Research - 31 May 2019