Period  2Q13 / 1H13

Actual vs. Expectations  Kimlun Corporation (“Kimlun”) reported H13 core net earnings of RM16m for 1H13, below our and streets expectation as it only makes up 27% and 31% of the estimates, respectively. The unexpected poor performance was due to higher-than-expected sunk cost incurred for the operations of its new plant in Senawang which have yet reach its optimal utilisation rate.

Dividends  No dividend declared as expected.

Key Results Highlights  Uninspiring 1H13, the main drag on its earnings of RM16m (-37%) was due to slower construction activities with revenue sliding 10% to RM364.5m. Its manufacturing segment also saw a margin squeeze of 9.6ppt from 27% to 17% despite better sales of RM94.4m (+116%).

 Despite a sizeable construction orderbook of RM1.3b, the construction revenue in 1H13 was affected by timing issues where newly secured projects have yet to reach the critical progress level for meaningful contributions.

 The margin compression in its manufacturing division was predominantly due to its new plant in Senawang operating sub-optimally at utilisation rates of 30%-40%, coupled with higher depreciation and financing cost of RM9.3m (+158%) and RM5.3m (+92%), respectively.

 The higher depreciation was due to its new Senawang plant while the jump in finance cost was in tandem with the increase in its net gearing (1H13: 0.6x, 1H12: 0.2x) for its CAPEX spending requirements.

 QoQ, Kimlun registered 9% growth in revenue to RM234.3m. However, its 2Q13 net profit plunged 20% to RM7.1m due to a dip of 1.7ppt in construction operating margin from 8.4% to 6.7% due to a larger proportion of lower margin projects being executed, coupled with higher depreciation and financing costs.

Outlook  Despite the poor results, Kimlun’s outlook remains bright given their strong track records in building project, especially those with IBS components. In fact, after releasing the results, Kimlun announced that they had accepted a letter of award from Mah Sing Properties Sdn Bhd for the construction of factories in Johor Bahru with a contract sum worth RM59m.

 Its total outstanding orderbook stands at RM1.7b (construction: RM1.3b, manufacturing: RM400m), enough for Kimlun to churn for the next two years.

Change to Forecasts  We slashed our FY13E-FY14E estimates by 29% and 15% respectively as adjusting our assumptions to be in line with the current operating margin trend for both its construction and manufacturing divisions as we believe that depreciation and financing cost will remain high due to plant expansion.

Rating   Downgrade to MARKET PERFORM

 Following our downward revision in earnings, we have downgraded Kimlun to MARKET PERFORM from OUTPERFORM given the limited upside to our Target Price of RM1.93.

Valuation  In tandem with the revision in earnings, we reduced our Target Price from RM2.28 to RM1.93 based on an unchanged 9x FY14 PER.

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

Source: Kenanga