We attended KIMLUN’s briefing and came away positive on its short-to-medium term prospect premised on potential contract flows from major rail projects while FY18-19E earnings forecasts remain intact supported by outstanding construction/manufacturing order-book of RM1.8b/RM0.3b. Upgrade KIMLUN to OP with higher TP of RM2.55 on higher PER of 10x (from 9x) underpinned by a robust outlook ahead.

FY17 recap. FY17 CNP of RM70m 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 division leading to an overall drag in group GP margin (-2ppt). In addition, they also provisioned for doubtful debts worth RM11m on aging receivables. We take comfort that management do not expect to see further provisions for doubtful debts moving into FY18.

Steady construction replenishment. YTD, KIMLUN has secured RM70m worth of construction jobs; within our FY18E replenishment target of RM1.0b. We believe our target is achievable as KIMLUN aims to continue bagging jobs within the affordable homes segment whereby they can leverage on their IBS construction methods as a competitive edge while also aiming for on-going major infrastructure construction projects, ie Gemas JB double track, RTS, MRT3, ECRL and HSR.

We believe KIMLUN would submit bids at the sub-package levels for these major rail jobs.

Manufacturing outlook robust. With the recent awards of DTSS2 (Deep Tunnel Sewerage System 2, Singapore) to main contractors, KIMLUN is currently tendering for the precast packages from these main contractors which we expect to be awarded by 2H18. Additional prospect within their manufacturing division remains bright especially for the supply of SBG/TLS/rail sleepers for major rail projects (listed above) in the near future. To recap, KIMLUN has supplied c.50% of SBG and TLS packages for KVMRT1 and KVMRT2. YTD, KIMLUN has secured RM40m worth of manufacturing contracts (from Singapore MRT) accounting for 13% for our FY18E manufacturing replenishment of RM0.3b.

Decent order-book, exciting outlook. Currently, KIMLUN’s outstanding construction order-book stands at c.RM1.8b, providing visibility for the next two years. Moving forward, we expect higher construction revenue as existing major projects, i.e. Pan Borneo; move into more advanced billing stages. Meanwhile, we also expect to see manufacturing contribution growing on the back of an outstanding manufacturing order-book of RM0.34b as delivery of SBG and TLS packages for MRT2 is expected to pick up pace. Post briefing, we make no changes to our FY18-19E earnings estimates. Upgrade to OUTPERFORM with higher TP of RM2.55 (from MP; TP: RM2.30) on higher applied 10.0x FY18E PER pegged at +0.5SD @ 5- year average (from 9.0x @ 5-year average) underpinned by KIMLUN’s robust replenishment outlook due to their niche expertise within the precast manufacturing segment which bodes well with the ongoing rail projects theme. While KIMLUN’s margins might be marginally below peers (KERJAYA, HSL, MITRA) at 8% vs. 9%; we note that their dividend yield of 3.0% is above the average of 1.9%. Hence, we are comfortable with our upgrade in PER valuation to 10x given that it is also well within our targeted small-mid cap peers’ range of 8.0-13.0x.

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

Source: Kenanga Research - 14 Mar 2018