1H17 CNP of RM30.5m accounted for 42%/43% of our and consensus expectations, which we deem broadly in line as we expect billings from their manufacturing segment to accelerate in 2H17 from SBG and TLS orders for MRT2. No dividends declared as expected. Maintain FY17-18E earnings forecasts. Maintain MP with unchanged TP of RM2.27 based on applied 9.0x FY18E PER.

Broadly within expectations. We deem the 1H17 CNP of RM30.5m as broadly within expectation despite accounting for 43% and 42% of our expectation and consensus, respectively, as we expect billings from their manufacturing segment to pick up in 2H17 from SBG and TLS orders for MRT2. We derive our CNP after reversing out unrealized forex losses of c.RM0.3m. No dividends were declared, as expected.

Results highlight. 2Q17 CNP of RM16.3m improved 15% QoQ from higher revenue (+14%) stemming from higher billings on their construction front, which also garnered slightly better margins (+1ppt) due to the execution of better margined construction jobs. 1H17 CNP decreased 28% due to lower revenue recognition (-24%) mainly due to lower construction works billed (-16%) and lower manufacturing revenue recognized (-61%). The slower construction billings were due to jobs secured in FY16 being in their early stages and yet to reach advanced billings stage while the weaker manufacturing revenue was due to completion of TLS orders from Singapore in FY16 pending the supply of KVMRT2 SBG packages, expected to pick up from 2H17 onwards.

Construction outlook. YTD, KIMLUN has secured c.RM600m worth of contracts accounting for 60% of our RM1.0b construction replenishment target. We believe our replenishment target is achievable, backed by affordable housing projects given their pioneer status as an IBS player which allows for speedier construction and less labour requirements. Current outstanding construction order-book stands at RM1.93b providing visibility for the next 2.0 years. Meanwhile, we expect construction works from Pan Borneo, which makes up c.30% of their outstanding order-book to pick up at a quicker pace from 2H17.

Manufacturing outlook. YTD, KIMLUN has secured c.RM90m of manufacturing orders making up 30% of our RM300m targeted replenishment. Replenishment target is backed by potential Singapore manufacturing packages, i.e. DTSS 2, MRT Circle line 6 and North South Corridor Expressway to be awarded later in the year. Current outstanding manufacturing order-book stands at RM0.33b providing visibility for c.2 years.

Maintain earnings. We make no changes to our FY17-18E earnings forecasts.

Maintain our MARKET PERFORM call with an unchanged TP of RM2.27 based on applied 9.0x FY18 PER. While KIMLUN’s applied valuation is at the lower end of our targeted small-mid cap peers’ range of 9.0x-13.0x, we believe it is justifiable as their average Fwd. FY17- 18E PAT margin of c.7% remains weaker compared to average peers’ (KERJAYA, HSL, MITRA) margins of c.10%. Although earnings outlook remains stable, catalysts are lacking.

Source: Kenanga Research - 30 Aug 2017