Yesterday, we attended KIMLUN’s 1H16 results briefing and came away reaffirmed on the company’s positive outlook which is underpinned by RM2.23b of outstanding order book and increasing demand for IBS/precast products. Key takeaways from the briefing include: (i) construction and manufacturing order book updates, (ii) business strategy for property division, and (iii) future company outlook. Post briefing, we keep our FY16-17E earnings estimates unchanged. Maintain OUTPERFORM with an unchanged TP of RM2.51 based on 9.0x FY17E PER.

Construction order book update. As of 8M16, KIMLUN’s construction division has racked up RM1.1b of contracts, in line with our RM1.1b replenishment target. While management believes they can secure another RM200-300m of jobs from the affordable housing space bringing FY16 replenishment to c.RM1.3b-RM1.4b; potentially surpassing our FY16E target, we are still keeping our FY16E target unchanged as we believe that the timing of these potential wins might cross over to FY17, which would be within our FY17E replenishment target of RM1.0b. In terms of management’s target, they are looking at RM700.0m-RM800.0m for FY17.

Manufacturing order book update. KIMLUN’s manufacturing division recorded RM230m worth of contracts for 8M16. We believe KIMLUN is on track to meet our FY16 manufacturing target of RM300.0m from the potential TLS order award for KVMRT 2 which is due to be announced soon. To recap, KIMLUN had secured the TLS order contract for KVMRT 1 amounting to RM48.5m. As of 1H16, KIMLUN’s total outstanding order book stands at RM2.23b (Construction: RM1.93b; Manufacturing: RM0.30b), providing earnings visibility for the next two years.

Property division strategy. As of July 2016, KIMLUN has completed their maiden property project ‘The Hyve’ (GDV of RM232m) with an unsold portion worth RM33m. They currently have one on-going project namely Taman Puteri@Pekan Nenas, Johor (GDV of RM48m) offering 131 units of semidetached and double-storey terraces recording 35% take-up, which is slated for completion soon. Going ahead, management has no planned launches for the next 12 months but instead plans to focus on clearing inventories from their existing developments by offering higher rebates, buyer-to-buyer schemes and engaging external agents to deliver sales. In terms of future development prospect, management indicated that they do not rule out the possibilities of securing new land banks for pocket developments through joint-venture structure with land owners. However, we opine that it would not happen in the near-to-mid term given the weak sentiment from the property market.

Company outlook. While management expects construction and manufacturing margins to trend lower going forward due to commencement of Pan Borneo construction and KVMRT2 SBG supply orders, we have incorporated these expectations into our estimates. We continue to believe that KIMLUN’s prospect remains bright underpinned by c.RM0.8b of construction tender book within the affordable housing and infrastructure space. For instance, their manufacturing arm is targeting precast viaducts for LRT3 and TLS supplies and jacking pipes to Singapore’s MRT lines (new and existing) and Deep Tunnel Sewerage project (Phase 2), respectively. On the other hand, KIMLUN’s IBS division could further benefit from the increasing demand in affordable housing projects in line with the 11MP.

Earnings and Valuations. Post-briefing, we make no changes to earnings estimates as we already incorporated lower margin assumptions for FY17 as guided by management. Maintain our OP call with an unchanged TP of RM2.51 based on applied 9.0x FY17 PER. We believe valuation is justifiable as it is in line with the targeted small-mid cap peers’ range of 9.0x-13.0x.

Source: Kenanga Research - 22 Sep 2016