1H18 CNP of RM24.0m came below our/consensus expectations, accounting for 34%/35% of estimates due to lower-than-expected construction billings and manufacturing margins. No dividend declared, as expected. Reduced FY18-19E CNP by 16-12% after lowering our FY18E replenishment target to RM450.0m (from RM700.0m) coupled with tweaks in manufacturing margins. Maintain OP with lower TP of RM1.60 (previously, RM1.80).

Below expectations. 1H18 CNP of RM24.0m came below our/consensus expectations, accounting for 34%/35% of estimates due to lower-than-expected construction billings and margins from KIMLUN’s manufacturing division due to higher supply mix of KVMRT2 SBGs which generally command lower margin. No dividend was declared, as expected.

Results highlight. 1H18 CNP was down 25% YoY albeit decent improvement in revenue (+20%). This was largely due to the compression in operating margin to 8% (-4ppt) dragged down by both its construction and manufacturing divisions. The margin compression in its construction division was due to higher recognition of on-going projects with lower margins, while for manufacturing it was due to higher sales mix of KVMRT2’s Segmental Box Girders (SBG) that commands lower margin compared to Tunnel Lining Segment (TLS) coupled with higher fixed overheads. QoQ, the decline in 2Q18 CNP of 29% is mainly attributable to the compression in operating margins, dragged down by its construction division as it registered lower revenue (-9%) affected by festive seasons while its construction margin fell to 9% (-4ppt), due to similar reasons above.

Outlook. The outlook for the construction scene remains cloudy due to the uncertainties arising from the government’s move in reviewing and terminating major infra projects. While we reduced our FY18E construction replenishment target to RM450m, we maintained the following forecasts; (i) FY19E construction replenishment target at RM700m, and (ii) FY18/19E manufacturing replenishment target for KIMLUN at RM120m/150m. YTD, KIMLUN has secured c.RM200m worth of construction jobs and manufacturing orders of c.RM80m from Singapore bringing its current outstanding order-book (as of June 2018) to RM2.1b (construction RM1.7b; manufacturing RM0.4b) providing 2- year visibility.

Earnings estimates. Post results, we downgrade FY18-19E earnings by 16-12% after: (i) pushing forward progress billings assumptions and lowering margins for both construction and manufacturing division, and (ii) lowering FY18E construction replenishment to RM450m (from RM700m).

Maintain OUTPERFORM, lower TP of RM1.60 (from RM1.80) with an unchanged valuation of 8.0x FY19E PER within the range of 7-12x which we ascribed to small-mid cap players. Positively, its healthy outstanding order-book of RM2.1b would be able to help them weather through these uncertain times.

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

Source: Kenanga Research - 30 Aug 2018