KIMLUN has bagged a ‘Selangorku’ affordable homes contract worth RM165.8m. We are neutral on this project award, as it is within our FY16E orderbook assumption. Hence, we make no changes to our FY16-17E forecast. Maintain OUTPERFORM with an unchanged TP of RM2.10 based on 9.0x FY16 PER.

First affordable homes contract in FY16. Yesterday, KIMLUN announced a contract award worth RM165.8m from Hillcrest Gardens Sdn Bhd for the construction of five blocks of “Selangorku” affordable apartments in Mukim Petaling, Selangor. The contract is expected to take 35 months and slated for completion in April 2019.

 Within expectations. We are neutral on this news as the project value is within our FY16 construction orderbook replenishment assumption of RM1.14b. Year-to-date, KIMLUN has bagged RM975m worth of construction works representing 86% of our FY16 construction orderbook replenishment assumption with a RM163m balance to be filled. Meanwhile, KIMLUN’s manufacturing division has secured RM200m worth of contracts from KVMRT2 against our RM300m manufacturing replenishment assumption with a remainder of RM100m to be achieved. Assuming pre-tax margins of 7%, this particular contract is expected to contribute c.RM3.0m to bottom-line per annum, which is already factored into our FY16-17E earnings of RM70.0m- RM83.8m.

Potential upgrade. While this contract is within expectations, we note that KIMLUN has already secured 86% of our construction replenishment assumption within the first five months of FY16 and we may have to increase our FY16 construction orderbook assumption if they continue to secure jobs at a faster-than-anticipated rate.

Outlook remains bright. Currently, KIMLUN’s outstanding orderbook stands at RM2.24b (Construction: RM1.87b; Manufacturing: RM0.37b), providing earnings visibility for the next two years. We believe that KIMLUN’s prospect remains bright underpinned by c.RM1.8b of construction tenderbook within the affordable housing and infrastructure space while their manufacturing arm is targeting tunnel lining segment supplies to Singapore’s MRT (Eastern Region Line) and Deep Tunnel Sewerage project (Phase 2). In addition to that, we also expect their industrial building systems (IBS) division to greatly benefit from the increase in affordable housing projects inline with the 11MP.

Top Pick since 4QCY15. KIMLUN has been our Top Pick since our 4QCY15 Strategy report (5/10/15) and we reiterate our positive stance on the company with an unchanged OUTPERFORM call and TP of RM2.10 based on FY16E PER of 9.0x, which is inline with its targeted peers’ range of 9.0x-13.0x. We like KIMLUN for its potential orderbook growth and their presence as an established IBS player. Key risks to our call are: (i) lower-than-expected margins, and (ii) delays in construction works. 

Source: Kenanga Research - 4 May 2016