News  KIMLUN announced last week that it has secured two projects with a collective contract value of RM110.6m.

 The first project which is worth RM63.6m was awarded by UMLand consists of main building works for 89 units of factories in Johor Bahru. This job is scheduled to complete in Dec 2016

 The second project which was awarded by UEM Land is worth RM47.0m. The job scope includes infrastructure works for Phase 3 of Southern Industrial and Logistics Cluster in Nusajaya, Johor. This job is scheduled to complete in Dec 2016.

Comments  We are NEUTRAL to POSITIVE on the news. The new wins have already made up about 22% our FY15 new jobs replenishment assumption. If this momentum continues for the rest of this year, we believe our FY15 new contracts assumption of RM500m is rather achievable.

 However, we are wary on KIMLUN’s ability to fetch healthy margins for these jobs. This is after witnessing the group’s construction margins for the past 4 quarters staying below its 3-year historical average of 8.5%.

 Assuming 6% PBT margin on average, these jobs would add to KIMLUN’s net profit by RM2.5m (5.5% of FY15E earnings) per annum until FY16.

Outlook  Including this job, we estimate KIMLUN’s current outstanding orderbook stands at RM1.6b. This 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 came in below expectations.

Forecast  Unchanged.

Rating Maintain UNDERPERFORM

Valuation  We believe the company is still faced earnings risks after seeing the group’s persistent earnings disappointments. Moreover, the stock’s valuation is not compelling at this juncture.  

 Maintain TP of RM1.28 based on unchanged ascribed FY15 PER of 8x. Our ascribed PER of 8x is within the small cap peers’ range of 8x-10x.

Risks to Our Call Better than expected margins.

 Faster construction works.

 Higher-than-expected orderbook replenishment.

Source: Kenanga