Period

4Q15/FY15

Actual vs. Expectations

FY15 core net profit (CNP) of RM64.4m came in within our expectation but above consensus, accounting for 98%/110% of the estimates, respectively.

We believe the consensus may have been overly conservative on their margin assumptions and did not account for the higher-than-expected margin jobs.

Dividends

A final single tier dividend of 5.8 sen was declared implying net yield of 3.8%, above our expectation of 4.0 sen.

Key Results Highlights

YoY, FY15 CNP was up 41.2%, despite revenue declining 13.0%, on the back of higher margins from construction (+2.5ppt to 8.4%) and manufacturing (+11.1ppt to 28.0%) segments. Our CNP is derived after stripping-off forex gains. The improved construction margin was supported by execution of better margin projects coupled with lower fuel and raw material prices while manufacturing margin was bolstered by a higher proportion of sales order from TLS and jacking pipes (instead of SBG) which commanded superior margins.

QoQ, 4Q15 CNP increased 21.6% underpinned by higher sales and improved margins from its manufacturing segment (+2.4ppt to 34.3%), lower tax expense (-24%) and higher contribution from its JV company (+20.4%) which had higher progress billings from their property project namely HYVE, Cyberjaya.

Outlook

As of FY15, its outstanding orderbook for construction and manufacturing stands at RM0.94b and RM0.17b, respectively. That said, their JV venture has unbilled sales of RM11.0m from the HYVE project, providing a visibility of 1 – 1.5 year.

Outlook remains bright as more upcoming jobs are expected from: (i) governmental affordable housing jobs whereby >70% of IBS components compliance are requirements for these jobs, (ii) railway's material supply jobs, i.e. SBG and TLS to KVMRT2/LRT3, and (iii) Singapore MRT line extension and other sewerage projects. Our replenishment target for FY16 stands at RM700m which we deem achievable considering that KIMLUN has achieved slightly >RM600m in FY15.

Change to Forecasts

No changes to FY16 earnings and we introduce FY17 CNP of RM73.4m whereby we forecast more contribution from its manufacturing division.

Rating

Maintain OUTPERFORM

Valuation

We reiterate KIMLUN as our Top Pick in the Construction sector for its consistent performances backed by a bright orderbook replenishment prospect. Hence, we maintain our OUTPERFORM call with an unchanged TP of RM2.05, based on FY16E PER of 9.0x. The target PER is in line with the small-mid cap peers’ range of 9x-13x.

Risks to Our Call

Below-than-expected margins.

Delay in construction works.

Lower-than-expected orderbook replenishment.

Source: Kenanga Research - 29 Feb 2016