We attended KIMLUN?s briefing yesterday and came back feeling lukewarm on its near-to-mid term prospects due to timing mismatch of their manufacturing orders in FY17 and slower-than-expected manufacturing awards from Singapore. Other key highlights include: (i) updates on Pan Borneo, and (ii) construction outlook. Post briefing, we reduced our FY17-18E earnings by 16-9%. Downgrade from OP to MP with a lower TP of RM2.27 (from RM2.51) after rolling valuations forward to FY18E.

All about timing? Moving into FY17, we understand that manufacturing orders from Singapore?s MRT Thomson Line is coming to an end by 1Q17 and the delivery of Malaysia?s MRT2?s SBG and TLS supplies will only pick up from 4Q17 onwards. That said, the potential Singapore award packages i.e. DTSS 2, MRT Circle line 6 and North South Corridor Expressway are only expected later in the year. Hence, we expect its manufacturing division to record a lower revenue for the year due to the timing gap between the end of on-going projects and the delivery of MRT2?s packages in 4Q17. Currently, we make no changes to our FY17E manufacturing replenishment target of RM350m, which will be skewed towards 2H17, backed by the above-mentioned Singapore projects and LRT3. Currently, outstanding manufacturing order-book stands at RM0.26b which comprises mostly MRT2 SBG and TLS orders. (Refer overleaf for more)

Construction outlook. Within KIMLUN?s construction segment, management noted that they are targeting jobs within the affordable homes segment. We believe KIMLUN?s position as a pioneer in IBS should provide them with a competitive edge in the affordable homes segment as it allows for speedy construction with less labour intensive. Hence, we maintain our FY17E construction replenishment of RM1.0b. As of FY16, construction outstanding order-book stood at RM1.67b providing earnings visibility for 2 years.

Updates on Pan Borneo. It has been 11 months since KIMLUN has been on-site and on-going works for the WPC-03 package include: (i) relocation of existing electricity and water services, and (ii) ground treatment works for soil stabilization as the Sarawak grounds are soft and swampy ? causing roads to crack easily. Management notes that challenges faced in Pan Borneo job include: (i) soft ground and rainy weather issues, and (ii) lack of experienced workers within logistics and ground operations. Despite challenging, they noted that the upgrade works from single carriageway to double carriageway on WPC-03 has been progressing as planned.

Earnings downgrade. Post briefing, we lowered our FY17-18E earnings by 16-9% after accounting for: (i) lower manufacturing revenue recognition as explained above, and (ii) lower FY17E and FY18E manufacturing GP margin assumptions as bulk of the outstanding order-book is within the manufacturing division consisting MRT2 SBG and TLS supplies, which typically garner lower GP margins of c.16% as shown in FY13-14 when KIMLUN delivered SBG for KVMRT1.

Downgrade to MP (from OP). Post adjustment in earnings, we downgrade KIMLUN to MARKET PERFORM (from OP) with a lower target price of RM2.27 (from RM2.51) based on unchanged 9.0x FY18E PER (rolled over from FY17). We believe our valuation of 9.0x is fair despite being at the lower end of our targeted small-mid cap range of 9- 13x given that KIMLUN?s PAT margins of 7% is relatively weaker against peers (HSL, KERJAYA, MITRA) average margins of c.10%.

Source: Kenanga Research - 10 Mar 2017