Period  2Q14/1H14

Actual vs. Expectations 1H14 core net earnings of RM16.2m came in below expectations, making up 35% and 32% of our forecast and streets estimates. The negative variance was mainly due to lower-than-expected margin from construction division.

Dividends  None as expected.

Key Results Highlights QoQ, the key underperformance culprit on the 2Q14 earnings of RM7.5m (-14%) was lower construction division’s profit due to weak margin (2Q14: 5%, 2Q13; 7%) achieved in sub-contractor-services-related jobs.

 YoY, 2Q14 net profit increased slightly by 6% driven by higher revenue (+32%), boosted by construction and property segments. As for construction, greater billings were recorded in 1H14 following higher orders secured in FY13. As for property division, the higher sales recognised in 2Q14 was mainly due to progress of the Group’s maiden SOHO and offices property development project, namely Cyber Bistari (Hyve) in Cyberjaya, Selangor.

 Overall, YTD, 1H14 core net profit (after stripping out land sale gain of RM10.8m booked in 1Q14) was flat (+1%) due to lower margins in both construction and manufacturing divisions.

Outlook  Kimlun’s current outstanding orderbook of c.RM2.1b will provide earnings visibility for the next two years. Property development contribution should pick up in FY14-15E, thanks to unbilled sales of RM131m.

 Despite the strong outstanding orderbook, we believe that the near-term outlook remains lacklustre, as profit margins in both construction and manufacturing segments could remain under pressure for the next few quarters.

Change to Forecasts Conservatively, we cut our earnings forecasts by 16%-2% for FY14-FY15E after adjusting construction margins assumption.

Rating Maintain UNDERPERFORM

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

Valuation  Post-earnings revision, we tweaked our TP to RM1.57 (from RM1.60) based on an unchanged 9x fwd-PER over our FY15 core EPS of 17.4 sen.

Risks to Our Call Better than expected margins.

 Faster construction works

 Better raw material prices

Source: Kenanga