KIMLUN has secured a new contract worth RM164m from Sunway Iskandar Sdn Bhd. NEUTRAL over the wins as KIMLUN’s YTD replenishments are still within our FY18E target of RM570m. No changes in earnings. Maintain OP with an unchanged TP of RM1.60 based on FY19E PER of 8.0x.

Fourth win for the year. Yesterday, KIMLUN announced that they have secured a contract from Sunway Iskandar Sdn Bhd worth RM164.0m. The contract is for the main building works for 1 block of commercial building and 1 block of apartments at Medini Iskandar, Johor and is expected to complete by end of June 2021.

Neutral on the wins. We remain NEUTRAL on the wins as KIMLUN’s YTD contract replenishments of RM440m (YTD construction replenishment of RM360m; manufacturing RM80m) are still within our FY18E targeted replenishment of RM570m (Construction target: RM450m; Manufacturing target: RM120m). Assuming a PBT margin of 8%, the project is expected to contribute c.RM3.2m to KIMLUN’s bottom-line per annum over the next 3 years.

Outlook. We believe the contract win highlights KIMLUN’s ability to secure projects amidst an increasingly competitive environment. While outlook of securing major infrastructure projects remains lacklustre, we believe the near-to-mid-term outlook for KIMLUN is buoyed by affordable housing projects, in line with the government’s aim to increase home ownership in the affordable segment. 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 orderbook stands at c.RM2.3b (construction RM1.9b; manufacturing RM0.4b) providing 2-year visibility.

Earnings unchanged. Post contracts, we keep our FY18/19E earnings unchanged on: (i) FY18-19E construction replenishment of RM450- 700m, and (ii) FY18-19E manufacturing replenishment of RM120/150m.

Maintain OUTPERFORM with an unchanged TP of RM1.60 based on FY19E PER of 8.0x which is within the range applied on our small-mid cap players of 7-12x. Positively, its healthy outstanding orderbook of c.RM2.3b will be able to help them weather through challenging times. While we are keeping our recommendation and TP for now, we are looking to review our valuation for the entire construction sector post Budget 2019 with a downside bias given tougher times in terms of orderbook replenishments.

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

Source: Kenanga Research - 31 Oct 2018