Period  1Q14

Actual vs. Expectations Kimlun’s 1Q14 core net profit of RM8.7m is below expectations, accounting for 18.4% of our full-year forecast and 17.8% of consensus estimates. Note that we have excluded the Nilai land after tax disposal gain of RM10.77m in our core earnings figures.

 Main culprit of the earnings disappointment was higher-than-expected operating expenses and lower GP margin in manufacturing division.

Dividends  No dividend was announced during the quarter, as expected.

Key Results Highlights YoY, 1Q14 core net profit declined by 3.3% despite an 34.6% increase in core revenue. This was mainly due to higher effective tax rate (+0.9ppt), higher selling and administrative expenses (+27.7% YoY) and finance costs (+43.1% YoY) in the reporting quarter. The group GP margin improved by 1.6ppt due to a higher gross profit contribution from the property development division which was more than enough to compensate for the lower GP margin in both construction and manufacturing division.

 YoY, Kimlun’s construction GP margin eroded by 1.9ppt as the group has been involved in more projects involving the construction of high rise buildings which entail more specialist contractors and clients’ nominated sub-contractors services (SCNSC) which generally earns lower margin.

 Meanwhile, its manufacturing division also faces a 3.4ppt margin compression, underpinned by higher depreciation from new production plants which were set up in FY13 and the lower margins contribution in the KVMRT segmental box grinders and TLS supply contracts.

 QoQ, 1Q14 core revenue and PBT (excluding the land sale gain) surged by 16.1% and 67.5% respectively. The increase in revenue was mainly due to better performance in both construction and property development division. Group NP increased by a lower incremental rate of 43.8% vis-à-vis the increase in PBT, due to the recognition of tax incentives in 4Q13 vs. 26% of effective tax rate in the current quarter.

 QoQ, net gearing has been pared down from 0.8x to 0.3x (our comfortable zone) after the land sale.

Outlook  Kimlun’s current outstanding orderbook of c.RM2.1b will provide earnings visibility for the next two years.

 Property development’s contribution should pick up in FY14-15E, thanks to its unbilled sales of RM131m.

 Despite the strong outstanding orderbook, we believe that near term outlook remains lacklustre, as profit margin in both construction and manufacturing segment could be continually under pressure for the next few quarters.

Change to Forecasts We have lowered our FY14-15E core net profit estimates by 10%-5% respectively to RM46.6m-RM53.3m after accounting for higher operating expenses and a lower GP margin in the manufacturing division.

Rating Maintain UNDERPERFORM

 Maintain UNDERPERFORM rating, as the company continue to see margin risks and valuation is not compelling at this juncture.

Valuation  We revise our TP to RM1.60 from RM1.55 after the earnings adjustment and rolling over our valuation base year to FY15.

 Our valuation basis is based on an unchanged 9x fwd. PER over our FY15 core EPS of 17.7 sen.

Risks to Our Call  Better than expected margins.

 Faster construction works

 Better raw material prices

Source: Kenanga