News  Last Friday, KIMLUN announced that it has secured two building projects, collectively worth RM81.0m. Both contracts were awarded by Dynasty View Sdn Bhd, a subsidiary of United Malayan Bhd.  The first project (RM55.4m) consists of 2 blocks of apartments in Johor Bahru while the second project (RM25.6m) consists of building and infrastructure works for 57 units of houses in Johor Bahru.

Comments  We are NEUTRAL to POSITIVE on the news. In only the first month of the year, KIMLUN has managed to secure five projects collectively worth RM422.3m. This already made up 85% of our FY15 new contracts assumption of RM500m.

 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 four quarters staying below its 3-year historical average of 8.5%.  Assuming 6% PBT margin and two years project duration, on average, these jobs would add RM1.8m (4.0% of FY15E earnings) per annum to KIMLUN’s net profit until FY16.

Outlook  Including these projects, we estimate KIMLUN’s current outstanding orderbook to be RM1.9b which 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, as we opt to be conservative for now despite the faster-than-expected rate of orderbook replenishment. However, should KIMLUN surpass our new jobs assumptions of RM500m, we may revise our orderbook replenishments but earnings revision is subject to their ability to earn decent margins in coming quarters.

Rating Maintain UNDERPERFORM Valuation  We believe the company is still faced with earnings risks after several earnings disappointments. Moreover, the stock’s valuation is not compelling at this juncture.  Maintain TP of RM1.28 based on unchanged ascribed FY15E PER of 8.5x. Our ascribed PER of 8.5x is at the lower end of the small cap construction peers’ range of 8x-10x

Risks to Our Call  Better-than-expected margins.

 Faster construction works

 Higher-than-expected orderbook replenishment 

Source: Kenanga