KIMLUN has successfully secured two new projects with a collective value of RM225m. NEUTRAL over the wins as YTD replenishments still within our FY18E target of RM820m. No change in earnings. That said, we upgrade KIMLUN to OP with unchanged TP of RM1.80 as we see the recent sell-down as being overdone translating into a buying opportunity. KIMLUN would also potentially benefit from PH’s affordable home initiatives.

Two new contracts. Yesterday, KIMLUN announced that they have secured two contracts with a total value of RM225m. The first project worth RM144.1m is a design and build project for roads and interchange at Johor Bahru from Focus Ace S/B, slated for completion by Oct 2020. The second contract is a manufacturing contract from M+W Singapore Pte Ltd worth SGD27m (c.RM81m) to supply and deliver pre-cast building components by Dec 2018.

Neutral on the wins. We remain NEUTRAL on the wins as KIMLUN’s YTD contract replenishments of RM265m (YTD construction replenishment of RM184m; manufacturing RM81m) is still within our FY18E targeted replenishment of RM820m (Construction target: RM700m; Manufacturing target: RM120m). Assuming PBT margins of 8% for the road project and 15% for the pre-cast supplies, these contracts are expected to contribute c.RM12.7m to KIMLUN’s bottomline per annum.

Not all is lost. Despite the lack of major infrastructure projects moving forward, we believe near-mid-term outlook for KIMLUN is buoyed by affordable housing projects, in line with PH’s manifesto to build 1m affordable homes (within two terms). Given KIMLUN’s pioneer status as an IBS manufacturer coupled with their vast experience for building affordable homes, we believe they will stand to benefit from both the construction and manufacturing fronts. Currently, KIMLUN’s outstanding order-book stands at RM2.17b (construction RM1.72b; manufacturing RM0.44b) providing 2-year visibility.

Earnings unchanged. Post contracts, we keep our FY18/19E earnings unchanged on: (i) FY18-19E construction replenishment of RM700m, and (ii) FY18-19E manufacturing replenishment of RM120/150m.

Upgrade to OUTPERFORM (from MP) with an unchanged TP of RM1.80 based on unchanged FY19E PER of 8.0x. We think our upgrade to OP is fair as we find the recent sell down overdone (-33% YTD) given that KIMLUN is backed by a healthy order-book which can last them 2 years and they also stand a good chance to benefit from PH’s affordable housing initiatives. We believe upside catalysts for the stock would be: (i) further wins from Singapore to showcase that KIMLUN’s manufacturing arm is not overly reliant on local contracts, i.e. MRT, (ii) affordable homes contracts wins, and (iii) PH government’s endorsement of IBS implementation into projects.

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

Source: Kenanga Research - 7 Jun 2018