1Q16 CNP of RM20.3m was broadly within our expectations at 29% but above street’s estimates at 32%. We deem our estimates broadly inline as we foresee construction margins to reduce slightly moving forward. We believe the outperformance against street’ estimate was due to overly conservative margins assumption. No dividend declared as expected. We make no changes to our earnings estimates. Hence, we maintain our OUTPERFORM call with an unchanged TP of RM2.10 based on 9x FY16 PER which is inline with targeted small mid cap peers’ range of 9-11x.

Broadly within expectations. 1Q16 CNP of RM20.3m was broadly within our expectation at 29% but above streets estimates at 32%. We deem our estimates broadly inline as we foresee construction margins to reduce slightly to a high single digit level vis-a-vis 1Q16’s construction margin of 11% due to higher proportion of billings from the lower margin affordable homes projects going forward. We believe the outperformance against street was due to over-conservative margin assumptions. No dividends were declared as expected.

Results Highlight. Despite the drop in revenue by 27%, 1Q16 CNP was up 44% YoY underpinned by: (i) higher construction GP margins (+4.1ppt) as a result of better margin mix projects, lower raw material and fuel prices coupled with (ii) higher manufacturing GP margin (+7.3ppt) due to 1Q15 seeing margins being dragged down by lower margin yield KVMRT 1 SGB sales orders. CNP was up marginally by 2.0% QoQ on the back of a slightly higher revenue growth (+1.2%) and +0.4ppt increase in GP margin.

Orderbook replenishment assumptions. On the construction front, KIMLUN has secured RM975m worth of jobs YTD representing 86% of our RM1.14b replenishment assumption with a remainder of RM163m to be achieved. As for the manufacturing division, KIMLUN has secured RM200m worth of contracts against our RM300m assumption. Currently, KIMLUN’s outstanding orderbook stands at RM1.82b (Construction: RM1.48b; Manufacturing: RM0.34b), providing earnings visibility for the next 1.5-2 years.

Prospect. 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.

Valuations. With no change in earnings, we maintain our OUTPERFORM call with an unchanged TP of RM2.10 based on FY16E PER of 9.0x, which is inline with its targeted small mid cap peers’ range of 9.0x-11.0x. 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 - 31 May 2016