KIMLUN?s 9M16 CNP of RM58.0m was within ours and consensus expectations at 74% and 77% respectively. No dividend was declared as expected. Maintain FY16- 17E earnings estimate. Reiterate OUTPERFORM with an unchanged TP of RM2.51 based on 9.0x FY17E PER.

Within expectations. KIMLUN?s 9M16 CNP of RM58.0m was within ours and consensus expectations at 74% and 77%, respectively. No dividends declared as expected. Yesterday, KIMLUN also announced a new award worth RM52.8m for the supply of KVMRT2 TLS to MMC-GAMUDA (refer below).

Result highlights. 9M16 CNP was up 30% YoY on the back of (i) improved construction GP margin (+2.5ppt) due to execution of better margin projects, (ii) improved manufacturing GP margin (+6.7ppt) as 9M15?s manufacturing margins dragged down by KVMRT1?s lower margin SBG orders, (iii) lower financing costs (- 14%), and (iv) lower effective tax rate (-2.3ppt).

3Q16 CNP of RM15.7m declined by 29% QoQ mainly bogged down by the weaker revenue achieved within their manufacturing division (-34%) as a result of the completion of UPTN TLS sales order in preceding quarter and completion of IBS sales orders to RAPID in the current quarter. That said, manufacturing GP margin was also weaker (-6.3ppt) due to slightly higher fix overhead costs.

New contract for manufacturing division. Yesterday, KIMLUN has bagged the KVMRT2 Tunnel Lining Segment (TLS) supplies contract worth RM52.8m from MMC-GAMUDA which is expected for completion in Sept-19. We note that we have long anticipated this contract win as they had previously bagged the TLS order for KVMRT1 back in FY12. Imputing the new win, KIMLUN has secured RM283m worth of manufacturing contracts YTD, representing 94% of our FY16 replenishment target for manufacturing.

Company outlook. While its YTD construction job wins of RM1.1b is inline with our full year construction replenishment target of RM1.1b, management believes they can secure another RM200- 300m of jobs from the affordable housing space bringing its FY16 replenishment to c.RM1.3b-RM1.4b; surpassing our FY16E target. However, 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 fall into our FY17E replenishment target of RM1.0b. Currently, its total outstanding orderbook stands at RM2.1b (Construction: RM1.8b; Manufacturing: RM0.33b) providing visibility for the next 2 years. Moving forward to FY17, we expect to see construction margins to trend down on the back of increased billings from their newly secured Pan Borneo contract early this year. Nonetheless, we remain optimistic over KIMLUN?s prospects backed by their industrial building systems (IBS) products, which will greatly benefit from the increase in affordable housing projects in line with the 11MP.

Keep earnings unchanged. Post results, we make no changes to FY16-17 earnings estimates.

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 - 30 Nov 2016