FY17 CNP of RM70.0m is above our/consensus expectations, accounting for 110% of both estimates due to stronger-than-expected GP margins from their construction division. That said, the 5.5 sen final dividend declared in FY17 is in line with our 5.2 sen estimate. Increase FY18E CNP by 4% while introducing FY19 CNP of RM90m. Maintain MP with higher TP of RM2.30 based on 9.0x FY18E PER.

Above expectations. FY17 CNP of RM70.0m is above our/consensus expectations, accounting for 110% of both estimates due to stronger- than-expected GP margins from their construction division. That said, the 5.5 sen final dividend declared in FY17 is in line with our 5.2 sen estimate.

Results highlight. FY17 CNP was down 15% YoY despite higher revenue (+5%) due to lower mix of precast revenue contribution (-46%) which has much better margins compared to construction segment leading to an overall drag in total group GP margins (-2ppt). Precast contribution was down due to the initial delivery phases for MRT2 precast products. 4Q17 CNP of RM25.3m improved 78% QoQ mainly due to the surge in revenue (+50%) especially from their construction segment (+56%) as Pan Borneo progressed at a much faster pace.

Outlook. Moving forward, we opine that KIMLUN will continue to purchase pocket of land banks in Johor should opportunity arises given their manageable gearing level (0.07x as of 4Q17). Currently, its outstanding construction order-book stands at c.RM1.8b, providing visibility for the next two years. Moving forward, we expect construction revenue to pick up pace as major projects, i.e. Pan Borneo; move into more advanced billing stages. Its manufacturing order-book replenishment target is backed by potential manufacturing packages from Singapore, i.e. DTSS 2, MRT Circle line 6 and North South Corridor Expressway and further packages from Malaysia’s MRT2. Current outstanding manufacturing order-book stands at RM0.34b, providing visibility for c.2 years. We anticipate contributions from KVMRT2 TLS and SBG to continue picking up pace in FY18 and FY19.

Earnings estimates. Post results, we upgrade FY18E earnings by 4% to RM82m after tweaking for higher constructions margins. Subsequently, we introduce our FY19E CNP of RM90m. We are targeting construction replenishment of RM1.0b and manufacturing replenishment of RM300m each for FY18 and FY19.

Maintain our MARKET PERFORM call with higher TP of RM2.30 (from RM2.27) based on applied 9.0x FY18E PER post-adjustment towards earnings. While KIMLUN’s applied valuation is at the lower end of our targeted small-mid cap peers’ range of 8.0-13.0x, we believe it is justifiable as their average FY17-18E PAT margin of c.7% is weaker compared to peers’ average margin of c.9% (such as KERJAYA, HSL, MITRA).

Key downside risks for our call are: (i) lower-than-expected margins, and (ii) delays in construction works.

Source: Kenanga Research - 28 Feb 2018