We came back from KIMLUN analysts’ briefing yesterday feeling positive on the group’s outlook moving forward. The key highlights from the briefing are: (i) construction and manufacturing orderbook replenishment target of RM700-RM920m, (ii) growing contribution from IBS projects, and (iii) Pan Borneo highway award win amounting to RM1.46b with Zecon Bhd (30:70). KIMLUN’s surprise win of the Pan Borneo highway on top of its ongoing tender book of RM2.0b has further reaffirmed our conviction on the stock as our Top Pick for the sector. Post-briefing, we increased our FY16E and FY17E earnings by 2% and 14% to RM70.0m and RM83.8m, respectively, after incorporating Pan Borneo’s win into our orderbook replenishment target, and raised our Target Price to RM2.10 based on an unchanged 9x FY16E PER while reiterating our OUTPERFORM call on the stock.

1st West Malaysia contractor win in Pan Borneo. Yesterday, KIMLUN together with its joint-venture partner Zecon Bhd (30:70) announced that they have secured a contract award from Lebuhraya Borneo Utara Sdn Bhd worth RM1.46b. This particular Pan Borneo highway package is the WPC3 starting from Serian roundabout to Pantu junction with a construction timeline of 48 months, which is scheduled for completion in March 2020. The scope of works covers 73km of road works coupled with construction of 3 flyovers and 20 bridges. We were positively surprised with the win which was not factored into our earlier FY16E replenishment target of RM700.0m. KIMLUN’s 30% contract portion of c.RM438.0m made up 62.5% of our target. Assuming a conservative pre-tax margin of 7% in light of unexpected operating risks, we expect the Pan Borneo WPC3 to contribute c.RM5.7m per annum to its bottomline.

Target construction replenishment of RM600-800m. Not accounting Pan Borneo’s win, KIMLUN is stilling targeting an orderbook replenishment of RM600m-800m for its construction division underpinned by its on-going tender book of RM2.0b from affordable housing and infrastructure projects. Including this Pan Borneo contract, the group’s estimated outstanding orderbook for construction stands at RM1.60b providing visibility of 3-4 years. To recap, KIMLUN has clinched RM711m worth of new contracts thus far of which RM438.0m from Pan Borneo WPC3 and RM273.0m from others, exceeding our full-year new contracts assumption of RM700m. Thus, we bumped up our FY16E construction orderbook replenishment assumptions accordingly to RM1.14b. We believe our new replenish target of RM1.14b is achievable; given that c.63% of our replenishment assumptions has already been secured in 1Q16, with RM427.0m remaining to be achieved in FY16.

Manufacturing orderbook target of RM100m-120m in FY16. KIMLUN’s current outstanding manufacturing orderbook stands at RM0.17b with its outlook looking bright from the commencement of award rollouts by Singapore’s MRT Eastern Region Line and Singapore’s Deep Tunnel Sewerage project (Phase 2). We are confident that KIMLUN will benefit from these two projects given that they had been supplying 40% of TLS for the on-going Downtown and Thomson Line worth RM270m. Hence, no changes to our FY16E RM120m manufacturing replenishment assumptions which is inline with managements’ target.

Prominent IBS player with growing contributions. From FY10 to FY15, IBS’s contribution towards its construction revenue increased from 18% to 39%, which further enhanced its construction margins from 6.0% to 8.4% from a year ago. The increase in contribution is attributed to: (i) KIMLUN being a complete IBS contractor who can design, manufacture and build coupled with (ii) 70% IBS compliance requirement for governmental projects since 2008. Moving forward, we anticipate the rise in affordable home projects in line with 11MP and government initiatives on promoting IBS to greatly benefit KIMLUN.

Remains as our Top Pick. Post-briefing, we increased our FY16E and FY17E earnings by 2% and 14% to RM70.0m and RM83.8m, respectively, on the back of a higher target orderbook after the Pan Borneo contract win. We reiterate our OP call with a higher TP of RM2.10 (previously, RM2.05) based on unchanged FY16E PER of 9.0x, which is in line with peers’ range of 7x-13x. We like KIMLUN because of their potential orderbook growth from manufacturing, which provides good margins and their presence as an established IBS player in the market.

Source: Kenanga Research - 11 Mar 2016