Period

3Q15/9M15

Actual vs. Expectations

9M15 core net profit (CNP) of RM49.3m came in above expectations, accounting for 108% and 97% of consensus and our estimates, respectively.

The positive variance is mainly attributable to execution of better margin construction projects, lower raw material prices and better margins Tunnel Lining Segment (TLS) and jacking pipes sales order.

Dividends

None as expected.

Key Results Highlights

YoY, 9M15 CNP surged 39.3% to RM49.3m, despite revenue decline of 11.6% to RM821.7m, on the back of higher margin from construction (+2.5ppt to 8.1%) and manufacturing (+9.6ppt to 25.6%) segments. The construction margin was supported by execution of better margin projects coupled with lower fuel and raw material price while manufacturing margin was bolstered by a higher proportion of sales order from TLS and jacking pipes, which commands superior margins over the KVMRT Segmental Girder Box (SBG) orders.

QoQ, 3Q15 revenue was down by 6.7% to RM241.1m due to completion of projects in 2Q15 and slower billings from current projects that are still at initial stages. Nevertheless, CNP rose by 25.8% to RM19.6m on the back of: (i) improved margins from construction (+0.5ppt to 9.3%) and manufacturing (+11ppt to 32.0%), (ii) lower selling and administrative expense (-9.1%), and (iii) a higher contribution from their JV (292%) which had higher construction progressive billings.

Outlook

YTD, the group’s outstanding orderbook for construction and manufacturing are RM0.94b and RM0.20b, respectively. The group has secured c.RM600m new contracts, which met c.86% of our orderbook replenishment assumption of RM700m.

Outlook remainss bright as: (i) more upcoming affordable housing jobs in the Southern region 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 further from the Singapore MRT line extension.

Change to Forecasts

Upgrade our FY15-16E earnings by 37-28% to RM65.5-68.7m, on the back of stronger margins arising from construction segments, where we ramp up our construction GP margin assumption by 2ppt to 8% for FY15 and FY16.

Rating

Maintain OUTPERFORM

Valuation

We reiterate KIMLUN as our top pick as we are positive on its outlook being one of the contractors that will benefit from the 11MP.

We maintain our OUTPERFORM call with a higher TP of RM2.05 (TP of RM1.63 previously), based on FY16E PER of 9.0x. The target PER is in line with the small-mid cap peers’ range of 9x-13x, which is conservative considering its higherthan- average margins.

Risks to Our Call

Below-than-expected margins

Delay in construction works

Lower-than-expected orderbook replenishment

Source: Kenanga Research - 27 Nov 2015