Kimlun’s FY19 earnings of RM59m (-4% YoY) were within both ours and consensus expectations. YTD core PATAMI declined due to higher finance costs partially cushioned by stronger topline growth from all segments. Kimlun’s outstanding construction orderbook now stands at RM1.3bn, translating to a healthy cover ratio of 1.3x. Its manufacturing orderbook stands at RM240m, representing c.0.9x cover. Maintain earnings forecasts. Despite the satisfactory results, we grow concerned over its quickly depleting orderbook compounded by backdrop of delay risks in project rollouts due to the uncertain political situation. We downgrade the stock to HOLD rating with lower TP of RM1.04 (from RM1.19). TP is pegged to 7x FY20 earnings (from 8x).

Within expectations. Kimlun reported 4QFY19 results with revenue of RM323.0m (- 4% QoQ, +4% YoY) and core earnings of RM16.7m (+35% QoQ, -27% YoY). This brings FY19 core earnings to RM58.5m (-4% YoY). The core earnings accounted for 104% of our full year forecast (consensus: 101%) which is within expectations.

Dividends. DPS of 3.3 sen was declared during the quarter (FY19: 3.3 sen, FY18: 3.7 sen).

QoQ. Core PATAMI increased by 35% mainly due to higher margin in construction segment as GP margin expanded by 4.1ppts to 9.8% due to higher composition of lower margin projects during the quarter.

YoY. Core PATAMI declined by 27% due to lower GP margin of 12.0% (against 14.6% in 4QFY18) 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 decreased by 4% on the back of higher finance costs partially cushioned by stronger topline growth from all segments.

Construction. Revenue grew by 28% 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 RM413m in FY19. Its outstanding construction orderbook now stands at RM1.3bn, translating to a cover ratio of 1.3x to FY19 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 +32% 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.0.9x cover on FY19 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 FY20.

Forecast. Maintain forecasts as results are within expectations.

Donwgrade to HOLD, TP: RM1.04. Despite the satisfactory results, we grow concerned over its quickly depleting orderbook for both manufacturing and construction segments compounded by backdrop of delay risks in project rollouts due to the uncertain political situation. We downgrade the stock to HOLD rating with lower TP of RM1.04 (from RM1.19). TP is pegged to 7x FY20 earnings (from 8x).

Source: Hong Leong Investment Bank Research - 28 Feb 2020