Period

2Q15/1H15

Actual vs. Expectations

1H15 core net profit (CNP) of RM29.7m came in above expectations, accounting for 64% and 65% of our and consensus’s estimates, respectively.

The positive variance is mainly attributable to execution of better margin construction projects, better margin from Tunnel Lining Segment (TLS) and jacking pipes sales order from manufacturing segment.

Dividends

None as expected.

Key Results Highlights

QoQ, 2Q15 revenue declined by 20% to RM258.5m due to lower revenue from construction segment (-21.7% to RM211.6m), as some of the older projects were completed in 1Q15 while new projects secured have not reached the stage of active execution (due to the beginning-to-mid phase of the S-curve revenue recognition).

However, 2Q15 CNP rose by 10% to RM15.6m on the back of: (i) higher construction margin (+2.1ppt to 8.8%), (ii) lower selling and administrative expense, thanks to the forex gain of RM1.56m, and (iii) reduction in carriage outward by RM2.95m as a result of lesser delivery of finished goods to customers.

YoY, 1H15 CNP jumped 11.6% to RM29.7m, despite a revenue decline of 9.2% to RM580.6m, on the back of higher margin from construction (+2ppt to 7.6%) and manufacturing (+7.6ppt to 23.0%) segments. The construction margin was supported by execution of better margin projects and lower fuel and raw material price while manufacturing margin was bolstered by better margin from TLS and jacking pipes sales orders. That said, the significant improvement in both construction and manufacturing segment margins offset the reduction in revenue, which declined due to S-curve revenue recognition as outlined above.

Outlook

YTD, the group’s estimated outstanding orderbook for construction and manufacturing are RM1.15b and RM0.22b, respectively. The group has secured RM550m new contracts, which surpassed our full-year new contracts assumption of RM500m. Our contract assumption is relatively conservative as compared to management’s target of RM700m.

Stays bright as: (i) more upcoming affordable housing jobs in the Southern region of which KIMLUN is expected to participate, (ii) KIMLUN is one of the beneficiaries of the 11MP in which the group could participate in the railway’s material supply jobs, i.e. Segmental Girder Box as well as Tunnel Lining Segment, and (iii) KIMLUN is also expected to benefit from the Singapore MRT line extension.

Change to Forecasts

We revise upwards our FY15-16E CNP by 10-9% to RM50.8-54.6m, after adjusting for higher operating margin (+0.5ppt to 6-7% respectively) in order to better reflect the margin expansion in both construction and manufacturing segment.

Rating

Maintain OUTPERFORM

Valuation

We remain positive on KIMLUN’s outlook as we believe it is one of the contractors that will benefit from the recently announced 11MP.

Hence, post earnings revision, we maintain our OUTPERFORM call with a slight trim in TP to RM1.63 (RM1.66 previously), based on a lower applied FY16E PER of 9.0x (from 10.0x) which is also inline with its historical average.

The lower target PER is inline with the sector which has gone through a de-rating. Nonetheless, the target PER is still in line with the small-mid cap peers range of 7x-12x which is conservative considering their better-than-average margins.

Risks to Our Call

Below-than-expected margins

Delay in construction works

Lower-than-expected orderbook replenishment

Source: Kenanga Research - 28 Aug 2015