9M17 CNP of RM44.7m is below our/consensus expectations, accounting for 63%/64% of respective estimates due to unexpected provisioning for doubtful debts of RM5.9m in 3Q17. No dividends declared as expected. Lowered FY17E CNP by 10% after factoring in provisioning of doubtful debts but maintain FY18E earnings. Maintain MP with unchanged TP of RM2.27 based on 9.0x FY18E PER.

Below expectations. 9M17 CNP of RM44.7m came in below our/consensus expectations accounting for 63%/64% of respective estimates due to unexpected provisioning for doubtful debts of RM5.9m in 3Q17. No dividends announced as expected.

Results highlight. 9M17 CNP was down 23% YoY due to (i) the weaker revenue (-13%) dragged by lower top-line contributions from their manufacturing division (-53%) as outstanding manufacturing contracts in hand i.e. KVMRT2 TLS and SBG were still at initial phases, and (ii) lower EBIT margin of 11% (-1ppt) due to provision of doubtful debts of RM5.9m and higher depreciation charges (+25%). 3Q17 CNP of RM14.2m decreased 13% QoQ despite higher revenue recorded (+27%) due to the provision of doubtful debts as mentioned above.

Outlook. Current outstanding construction order-book stands at c.RM2.1b providing visibility for the next two years. Note that YTD construction wins stand at RM940m making up 94% of our FY17E replenishment target. We expect construction revenue to pick up pace as major projects i.e. Pan Borneo move into more advance billing stages. As for their manufacturing arm, 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 RM0.35b providing visibility for c.2 years. We anticipate contributions from KVMRT2 TLS and SBG to continue picking up pace in 4Q17.

Lowering FY17E earnings estimates. Post results, we lower our FY17E CNP by 10% to RM63.9m solely accounting for the unexpected provision for doubtful debts. We provided for RM9.0m of doubtful debts in our new FY17 estimates (vs. RM5.9m recorded YTD) as we do not discount further provisioning to occur in 4Q17 as there are c.RM2-3m of outstanding debts from the same client. Meanwhile, we maintain our FY18E earnings as we do not expect further provisioning for doubtful debts to occur in FY18.

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 8.0x-13.0x, we believe it is justifiable as their average FY17-18E PAT margin of c.7% is weaker compared to average peers’ (KERJAYA, HSL, MITRA) margins of c.9%.

Source: Kenanga Research - 30 Nov 2017