News    Kimlun announced that they were awarded a RM296m contract from Wealthy Growth Sdn Bhd, a subsidiary of IOI Properties Berhad for the construction of 2 towers of serviced apartments and ancillary buildings in Johor. 

Comments    We are neutral with the RM296m contract award as it forms part of our orderbook replenishment assumption of RM500m for FY13.

The construction of 2 towers of serviced apartments and ancillary buildings in Johor is expected to be completed by May 2016 whereby the project timeline spreads over a period of approximately 33 months. We are confident that Kimlun would be able to complete the project ahead of time. Assuming a conservative pre-tax margin of 8%, the whole project could possibly translate into about RM17.8m to Kimlun’s bottom line. 

Outlook   To date, Kimlun has managed to secure a total orderbook replenishment of c.RM486m making up 97% of our orderbook replenishment assumption of RM500m. Its current order book, which stands at c. RM1.8b, will last the group for another 2 – 3 years.

Going forward, the next re-rating catalyst for Kimlun would be another orderbook replenishment above RM100m thus surpassing our total orderbook assumption of RM500m for FY13. We continue to believe that there would be plenty of building projects in the two regions (Klang Valley and Johor) and expect Kimlun to be much more selective in accepting jobs due to their capacity constraint mainly due to labour shortage issue. 

Forecast   No changes to our earnings forecasts.

Rating   Maintain OUTPERFORM

Given the optimistic outlook on the construction sector, we believe that Kimlun would be the beneficiary for the upcoming MRT Line 2 as they are one of the TLS suppliers for the Sg.Buloh-Kajang MRT line.

Valuation    We are keeping our TP of RM2.28 based on 9x PER on its FY14 earnings.

Risks   Delays in executions and higher-than-expected building material prices.

Source: Kenanga