Kimlun’s 9MFY19 earnings of RM29m (+9% YoY) were below both ours and consensus expectations. YTD core PATAMI increased due to higher contribution from both construction and manufacturing segment. Kimlun’s outstanding construction orderbook now stands at RM1.5bn, translating to a healthy cover ratio of 1.9x. Its manufacturing orderbook stands at RM240m, representing c.1.2x cover. Cut FY19 earnings by 10% but increase earnings for FY20-21 by 1-2%. Maintain BUY rating with lower TP of RM1.40 (from RM1.58). TP is pegged to 8x FY20 earnings. We like Kimlun for its execution capability and undemanding valuations.

Below expectations. Kimlun reported 3QFY19 results with revenue of RM336.1m (+3% QoQ, +28% YoY) and core earnings of RM12.4m (-8% QoQ, -21% YoY). This brings 9MFY19 core earnings to RM41.7m (+9% YoY). The core earnings accounted for 66% of our full year forecast (consensus: 69%) which is below expectations.

Deviations. The negative surprise was mainly due to lower GP margin and higher than expected operating expenses resulting from ramp up of operational scale.

QoQ. Core PATAMI decreased by 8% mainly due to lower margin in construction segment as GP margin contracted by 5.2ppts to 15.5% due to higher composition of lower margin projects during the quarter.

YoY. Core PATAMI declined by 21% despite a revenue growth of 28% due to lower GP margin of 8.5% (against 11.9% in 3QFY18) largely attributed to higher composition of lower margin projects for (i) its construction activities as well as (ii) sales orders for precast segment.

YTD. Core PATAMI increased by 9% on the back of higher revenue contribution from construction and manufacturing segments.

Construction. Revenue grew by 34% YTD driven by higher revenue contribution from Pan Borneo Highway Sarawak (PBH) and an office tower project on higher percentage of completion. Kimlun has secured new construction contracts with total value of RM204m YTD. Its outstanding construction orderbook now stands at RM1.5bn, translating to a healthy cover ratio of 1.9x to FY18 construction revenue. We reckon Johor-based Kimlun is well positioned to secure jobs from the upcoming Rapid Transit System (RTS).

Manufacturing. Manufacturing segment recorded an impressive performance (revenue +76% YTD) due to higher revenue from MRT2 project and higher volume of quarry products supplied to the PBH. Kimlun’s manufacturing orderbook stands at RM240m, representing c.1.2x cover on FY18 manufacturing revenue. According to management, manufacturing job wins are expected to be in the range of RM80-120m. Going forward, the company intends to ride on Singapore’s infrastructure spending over the medium term with job wins likely to be driven by the extension of Singapore MRT rail network and North-South Corridor Expressway. Tender awards from these projects are likely to come in by FY20.

Forecast. Cut FY19 earnings by 10% to due to lower than projected margin but increase FY20/21 earnings by 2.1% and 1.6% after factoring in higher manufacturing job wins.

Maintain BUY, TP: RM1.40. Maintain BUY rating with lower TP of RM1.40 (from RM1.58). TP is pegged to 8x FY20 earnings. We like Kimlun for its execution capability and undemanding valuations.

Source: Hong Leong Investment Bank Research - 5 Dec 2019