1H16 CNP of RM42.3m was above our and consensus expectations accounting for 60% and 67% of estimates, respectively. This is due to our overly conservative construction and manufacturing margins assumptions. No dividends declared as expected. Upgrade FY16E earnings by 12.4% on the back of higher construction and manufacturing margins while keeping FY17E earnings unchanged. Maintain OP call with higher TP of RM2.51 (from RM2.10) after rolling valuation base year to FY17 on unchanged 9.0x PER.

Above expectations. KIMLUN’s CNP of RM42.3m was above our and consensus expectations accounting for 60% and 67% of estimates, respectively. The positive deviation was mainly due to our overly conservative construction and manufacturing margins. No dividends declared as expected.

Results highlight. Despite revenue being down 17.1%, 1H16 CNP was up 50.4% YoY underpinned by: (i) higher construction GP margins (+5.9ppt) as a result of better margin mix projects coupled with lower raw material and fuel prices, (ii) lower effective tax rate (-2.5ppt), and (iii) higher manufacturing GP margin (+10.7ppt) due to 1H15 margins being dragged down by lower margin yield from KVMRT 1 SGB sales orders. 2Q16 CNP increase 8.3% QoQ underpinned by higher manufacturing contributions (24.1%) on the back of higher margins (+2.8ppt).

Replenishment on track. 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 RM230m worth of contracts against our RM300m assumption. As of 30th June, KIMLUN’s outstanding order book stands at RM2.23b (Construction: RM1.93b; Manufacturing: RM0.30b), providing earnings visibility for the next two years.

Outlook. We believe that KIMLUN’s prospect remains bright underpinned by c.RM0.8b of construction tender book 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 in line with the 11MP.

Earnings upgrade. Post results, we upgrade FYE16 earnings by 15.0% on the back of higher construction and manufacturing margin assumptions while keeping FY17E earnings estimates unchanged.

Valuations. Following the earnings upgrade, we maintain our OUTPERFORM call with a higher TP of RM2.51 (previously RM2.10) after rolling forward valuation base year to FY17E on unchanged applied 9.0x PER. We believe valuations is justifiable as it is in line with targeted small-mid cap peers’ range of 9.0x-13.0x. Key risks to our call are: (i) lower-than-expected margins, and (ii) delays in construction works.

Source: Kenanga Research - 30 Aug 2016