We attended Kimlun’s 1H13 results briefing recently and came back with a neutral feeling on Kimlun. Our earlier conviction of a challenging operating environment for Kimlun, despite its strong RM2.0b orderbook and replenishment prospects, was reaffirmed as management guided for a subdued FY13 compared to FY12. Hence, we are maintaining our MARKET PERFORM call on Kimlun with an unchanged Target Price of RM1.93 based on 9x FY14 PER. Uninspiring 1H13 results. During the briefing, Kimlun’s management (CEO & CFO) addressed that its 1H13 earnings disappointment which saw a decline of 37% from RM25.3m to RM16m was mainly due to higher sunk cost arising from additional recruitment activities, higher financing and depreciation costs on its construction and manufacturing segments due to the additional CAPEX incurred previously on assets such as the Senawang plant, Johor plant enhancement, cranes and etc.

Orderbook still rosy and healthy. Despite the softer earnings, Kimlun’s outstanding orderbook remains healthy at RM2.0b (Construction: RM1.6b, Manufacturing: RM400m) which would keep them busy for the next two years. To recap, their year-to-date construction orderbook wins of up to RM1.0b mainly driven by the private sector projects i.e. Iskandar region building projects. It could possibly add another RM50m-RM100m worth of projects by year-end.

Spending to compete. In order to remain competitive in the local and Singapore market, management guided that they has allocated c.RM45m in FY13 to increase and enhance its plants capacity and technology. To date, Kimlun had spent c.RM20m in enhancing its Johor plant technology to cater for the new Tunnel Lining Segment requirement for the Thompson Line in Singapore and also added precast sleepers in their production line for the Tuas West Extension track works. They are also eyeing for more Tunnel Lining Segment packages to be dished out from Singapore’s Thompson Line. Management guided they are comfortable with a gross gearing level of up to 1.2x compared to the current 0.75x gearing which mean it could further gear up by another RM100m borrowing. They are looking at the possibility in doing a cash call in order to fund their future CAPEX and working capital needs.

Challenging year. While management is highly confident in replenishing its orderbook, underpinned by the local property market and Singapore’s Thompson Line, high operating cost remains a concern due to the recent subsidy rationalization coupled with the shortage of foreign labor and high fixed costs (financing and depreciation) which could further hurt the group’s margin. Hence, management guided that FY13 performance would not be as impressive as FY12 as they are anticipating subdued earnings in FY13. We had also projected Kimlun to record a lower profit of RM42.4m in FY13. Maintain MARKET PERFORM. Given the lacklustre of fresh catalysts in the near term, we are maintaining our MARKET PERFORM call on Kimlun with an unchanged Target Price of RM1.93 based on 9x FY14 PER.

Source: Kenanga