KIMLUN?s FY16?s CNP of RM82.2m was within our expectations at 104% but above consensus (109%) likely due to their overly conservative construction margin assumptions. 6.5 sen dividends declared for FY16, which is on the dot with our estimates. Maintain FY17E earnings estimates and introduce our FY18E earnings of RM85.9m. Maintain OP with unchanged TP of RM2.51.

Within expectations. KIMLUN?s FY16?s CNP of RM82.2m was within our expectations at 104% but above consensus (109%) likely due to their overly conservative construction margin assumptions. 6.5 sen dividends declared for FY16, which is on the dot with our estimates.

Results highlight. FY16 CNP was up 28% YoY despite the 11% dip in revenue due to: (i) improved construction margins (+4.1ppt) from better project mix and recognition of larger variation orders, (ii) improved manufacturing margins (+2.9ppt) as FY15 was bogged down by lower margin KVMRT1 SBG orders, and (iii) lower financing cost (-17%). 4Q16 CNP of RM24.1m was up 53% QoQ on the back of: (i) higher construction billings (+9%) coupled with improved margins (+7.4ppt) due to reasons stated above and (ii) lower financing costs (-9%).

Company outlook. For FY17E, we are targeting a construction replenishment target of RM1.0b which will be largely supported by affordable housing projects. As for their Manufacturing arm, we are targeting a replenishment of RM350m backed by TLS supplies to Singapore and the upcoming LRT 3 line. Currently, its total outstanding order-book stands at RM1.9b (Construction: RM1.67b; Manufacturing: RM0.26b) providing visibility for the next 2 years.

We are expecting its FY17E margins to trend down on the back of increased billings from their newly secured MRT2 TLS and SBG orders coupled with wage pressures and increasing raw material prices. Nonetheless, we remain optimistic over KIMLUN?s prospect backed by their industrial building systems (IBS) products, which will benefit greatly from the increase in affordable housing projects in line with the 11MP.

Maintain FY17E earnings. Post results, we make no changes to FY17E earnings estimates and introduce our FY18E earnings of RM85.9m.

Maintain our OP call with an unchanged TP of RM2.51 based on applied 9.0x FY17 PER. We believe our valuation is justifiable as it is in line with the targeted small-mid cap peers? range of 9.0x- 13.0x.

Risks to our call include: (i) lower-than-expected margins from Pan Borneo and KVMRT2 manufacturing sales orders, (ii) lower- than-expected construction billings, and (iii) lower-than-expected replenishment rates.

Source: Kenanga Research - 28 Feb 2017