Period  3Q13 / 9M13

Actual vs. Expectations  Kimlun Corporation’s (Kimlun)’s 9M13 net earnings of RM22.9m came in below our and streets expectation as it only makes up 53% and 57% of the full year estimates, respectively. The variance is due to our overly bullish initial recognition of construction revenue and higher than expected operating costs.

Dividends  No dividend declared as expected.

Key Results Highlights

9M13 vs. 9M12  Kimlun saw its earnings dropping 38% to RM22.9m. The main drag on its earnings was due to slower construction activities with it revenue sliding 12% to RM526.8m coupled with the margin compression on its construction arm.

 On a lighter note, its manufacturing arm’s managed to chart a 42% growth on its operating profit of RM25m despite margin compression (-8.1ppt) as the negative impact was offset by better revenue contribution, which increased by 109% to RM143.7m driven by the supply for Segmental Box Girders and Tunnel Lining Segment to the KVMRT project.

3Q13 vs. 3Q12 Its pre-tax profit plunged 51% from RM15.8m to RM7.7m despite a 6% improvement in its revenue of RM227.4m due to a larger proportion of lower margin projects being executed coupled with higher depreciation (+113%) and finance cost (+61%).

3Q13 vs. 2Q13 Its construction and manufacturing operating profit declined 29% and 8%, respectively, on the back of a slower revenue recognition from both these segments (construction, -14%; manufacturing, -7%).

 However, Kimlun’s property segment started to contribute with an operating profit of RM2.7m which cushioned the impact from the lower contribution of its construction and manufacturing segments. Hence, its earnings only dipped marginally by 3% from RM7.1m to RM6.9m.

Outlook  Kimlun’s total external outstanding orderbook remains very healthy at c.RM2b translating to about 2.2x of its FY12 revenue, enough to last for the next two years and we would expect earnings recovery from FY13 onwards as Kimlun goes full-swing on its newly secured projects.

Change to Forecasts We cut our FY13E estimates by 25% to RM31.7m after adjusting our orderbook churn rate assumption and higher operating cost for Kimlun.

Rating Maintain UNDERPERFORM We are keeping our UNDERPERFORM call on Kimlun at this juncture given the limited upside to our Target Price of RM1.93.

Valuation  No changes to our TP of RM1.93 based on an unchanged 9x FY14 PER.

Risks to Our Call  Faster projects executions and lower-than-expected building material prices.

Source: Kenanga