We attended KIMLUN?s 1H17 briefing and came away NEUTRAL as prospects are in line with our expectations. On a separate announcement, KIMLUN secured an RM50m infra contract from MAHSING, which is within our replenishment target. Key updates from briefing: (i) Pan Borneo progress, (ii) tender-book of RM1.55b, and (iii) challenges from steel price rise. FY17-18E earnings estimates unchanged. Maintain MP and TP of RM2.27.

Pan Borneo updates. Currently, the Pan Borneo construction progress is at 16% and we expect advance work progress for the project to pick up at quicker pace from 2H18.

Tender-book. Current tender-book for construction and manufacturing stands at RM1.55b comprising infrastructure and building projects. Management noted that they were unsuccessful in securing the LRT3 concrete product packages for their manufacturing division but will actively look out for new bids, especially from the recently announced JB Rapid Transit System (RTS) given the close proximity to their Johor plant. However, tender packages for the project have yet to be called. Management also indicated interest in participating in the ECRL contracts for the supply of concrete slippers.

Steel challenges. Given the recent rise in steel prices (+c.25% YTD), management notes that this could potentially impact their margins, especially for the projects secured in FY16 with steel prices of RM2,400-2,500/t while current steel prices are at c.RM2,600/t. However, they note that current situation is still manageable as long as steel prices remain <RM3,000/t. We are neutral on this as we had anticipated this issue and accounted for the lower construction margins in our FY17 and FY18 estimates.

New project and updates. On a separate announcement, KIMLUN has secured a RM50m job from MAHSING for the construction of a connecting road into the Tanjung Langsat ? Cahaya Masai Toll Connecting Highway, which forms part of the Senai Desaru Expressway. We remain NEUTRAL on this win as YTD contract wins of RM930m is still within our RM1.0b target. We believe our replenishment target is highly 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 c.RM2.0b providing visibility for the next two years.

Manufacturing update. 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. Current outstanding manufacturing order- book stands at RM0.32b providing visibility for c.2 years. We anticipate contributions from KVMRT2 TLS and SBG to pick up in 2H17.

Earnings, call and TP intact. Post briefing, 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 FY18E 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% is weaker compared to average peers? (KERJAYA, HSL, MITRA) margins of c.9%.

Source: Kenanga Research - 02 Oct 2017