Period  3Q14/9M14

Actual vs. Expectations 9M14 core net profit of RM25.2m came in below expectations, accounting for 64% and 62% of our and consensus’ full-year estimates, respectively. The negative variance was due to lower-than-expected margins which we had expected to improve this quarter.

Dividends  No dividend declared as expected.

Key Results Highlights QoQ, 3Q14 core earnings rose by 20% driven by higher operating margins i.e. (5.5% vs 4.7% in 2Q14) on the back of improvement in construction and manufacturing divisions’ margins albeit a slight drop in revenue (5%). As

for the manufacturing segment, major contributor for 3Q14 was still the sales of KVMRT2’s segmental girder box. Meanwhile as for construction segment, we believe the improved margins were mainly due to lower costs being incurred as projects started to reach mid-stage of completion.

 Overall, 3Q14 core net profit rose by 30% YoY and 10% YTD on the back of higher revenue (+30%) and enhanced margins in construction division, thanks to orderbook progress.

Outlook  Kimlun’s current outstanding orderbook of c.RM1.5b will provide earnings visibility for the next two years.

 Despite the strong outstanding orderbook, we believe that the near-term outlook remains lacklustre, as profit margins in both construction and manufacturing segments are still improving slower than expectations. In addition, the group has also only secured RM152m worth of new contracts in FY14 vs. our initial assumption of RM650m.

Change to Forecasts Conservatively, we cut our earnings forecasts by 18%-13% for FY14-FY15E after (i) adjusting orderbook replenishment rate lower by 69%-23% to RM200m-RM500m, and (ii) adjusting lower our FY14E-FY15E margins assumption as the rate of margins improvement was below our expectations.

Rating Maintain UNDERPERFORM

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

Valuation  Revised lower our TP to RM1.28 (from RM1.57) after we revised our earnings and lower our ascribed FY15 PER to 8x from 9x previously. We have imputed lower target PER due to the group’s persistent earnings disappointments.

Fwd-PER of 8x is still within the small cap peers’ range of 8x-10x.

Risks to Our Call Better than expected margins.

 Faster construction works

 Better raw material prices

Source: Kenanga