We attended KIMLUN’s analysts’ briefing last week and came away feeling NEUTRAL to POSITIVE on the group’s outlook moving forward. We laud the fact that the group has secured RM554m worth of new contracts, which has met c.80% of our orderbook replenishment assumption of RM700m. Meanwhile for FY15, management is targeting to achieve: (i) RM700m worth of new contracts for its construction division, and (ii) RM100-120m worth of new orders for its manufacturing division. Management updated that tenderbook stands at RM1.0b, which concentrates on affordable housing and infrastructure-related projects. As we have factored in respective targets previously, we keep our FY15- 16E earnings unchanged. Hence, maintain OUTPERFORM rating with unchanged TP of RM1.63.

1H15 results recap. To recall, KIMLUN is the only contractor under our coverage with its 1H15 results coming in better-than-expected due to: (i) execution of higher margin construction projects, as most of the lower margin projects were completed in 1Q15, and (ii) better manufacturing margin from Tunnel Lining Segment (TLS) and jacking pipes sales order.

Targeting to secure RM500-600m new contracts for FY16. YTD, the group’s estimated outstanding orderbook for construction and manufacturing are RM1.15b and RM0.22b, respectively. In terms of YTD new contracts, KIMLUN has clinched RM554m worth of new contracts, which is on track with our fullyear new contracts assumption of RM700m. Management is still confident in achieving RM700m of new contracts for FY15 and we believe the target is achievable, given that c.80% of its target was achieved in 1H15. However, management has a slightly conservative target of RM500-600m new contracts for FY16, excluding public sector projects, i.e. MRT2 and RAPID given building construction jobs are slowing down. This is in line with our FY16 new contracts assumption of RM550m, where we expect contracts to be secured from public infrastructure and MRT Line 2 projects. On top of that, KIMLUN’s current tenderbook stands at RM1.0b mainly come from affordable housing and infrastructure-related projects.

Forecast RM200m new orders for manufacturing segment in FY16. To date, KIMLUN has secured RM108m worth of manufacturing orders, which met our forecast of RM100m and is fairly close to management’s FY15 higher target of RM120m. Looking forward to FY16, while we do not have management’s guidance on manufacturing numbers, we expect RM200m new orders for the manufacturing segment, as we expect higher orders to come from public infrastructure and MRT Line 2 project, which is likely to be announced in 2016. Moreover, management guided that its Senawang plant is currently running at 30-40% utilisation rate. Assuming the execution of Thomson Line coincides with MRT Line 2 project, it will boost the utilisation rate to 60-70%, which is still manageable for the group.

Improved margins are here to stay? Management is expecting better margins this year as: (i) capex had been invested previously for the construction of high-rise building projects, (ii) better manufacturing margins from Singapore projects, and (iii) engagement of more experienced subcontractors to take on respective projects. Recall that manufacturing gross profit margin last year was dragged down by KVMRT SBG sales orders, which was subsequently completed in 1Q15.

Maintained our FY15-16E earnings forecasts. At this juncture, we are keeping our FY15-16E earnings unchanged. Any reward of significant projects shall be a positive catalyst to the group. Reiterate OUTPERFORM rating with unchanged TP of RM1.63, based on FY16E PER of 9.0x. The target PER is in line with the sector which has gone through a de-rating. Moreover, the target PER is also in line with the small-mid cap peer range of 7x-12x, which is conservative considering their better-thanaverage margins.

Source: Kenanga Research - 5 Oct 2015