FY18 CNP of RM61.1m came in above our/consensus expectations, at 118%/115% of estimates. A 3.7 sen dividend was declared, slightly below our 4.0 sen estimate. Upgrade FY19E earnings by 15% on higher construction billings and precast concrete delivery. Introduce FY20E earnings of RM61.9m. Maintain MARKET PERFORM with a higher Target Price of RM1.30 (previously, RM1.15).

FY18 above expectations. FY18 CNP of RM61.1m came above our/consensus expectations, at 118%/115% of estimates. This was mainly due to: (i) higher-than-expected construction billings from Pan Borneo Highway project, (ii) higher-than-expected delivery of its KVMRT2’s Segmental Box Girders (SBG) and IBS components, (iii) higher-than-expected margins due to cost savings from design elements of certain projects. A dividend of 3.7 sen was declared, slightly below our 4.0 sen estimate; an actual payout ratio of 20% vs. our assumption of 25%.

Results highlight. YoY, FY18 CNP declined 11% despite revenue improving 3%, as GP margin compressed (-1ppt) to 9% due to: (i) higher composition of lower margin projects in its project mix, (ii) higher sales proportion of its KVMRT2’s Segmental Box Girders (SBG) from its manufacturing division, which commands lower margin compared to its Tunnel Lining Segment (TLS), and (iii) higher effective tax rate. QoQ, 4Q18 CNP of RM22.9m jumped 46%, on the back of an 18% increase in revenue and improvement in GP margin in the construction segment arising from cost savings as mentioned above.

Outlook. Moving forward, we believe KIMLUN’s outlook should be buoyed by the affordable housing segment which we estimate should yield high single-digit to low-teens GP margins. For its manufacturing division, we continue to expect steady delivery of its precast concrete products amidst a higher sales mix from its KVMRT2’s Segmental Box Girders over its higher margin Tunnel Lining Segment. All in, while we anticipate higher construction billings from its Pan Borneo Highway (progress c.40%) as it moves into more mature stage, we anticipate a slight margin compression in FY19 premised on the reasons above. Nevertheless, KIMLUN’s outstanding order-book stands at c.RM2.2b (construction RM1.9b; manufacturing RM0.3b) which should provide 2- year visibility.

Upgrade FY19E earnings by 15% after: (i) increasing progress billings for its construction division, and (ii) tweaking precast concrete delivery progress for its manufacturing division. We also introduce FY20E earnings of RM61.9m based on collective replenishment target of RM850m (Construction: RM700m; Manufacturing: RM150m). Additionally, we lower both FY19-20E dividend payout ratios assumption from 25% to 20% in line with FY18, translating into 3.7 sen dividend per share.

Maintain MARKET PERFORM with a higher Target Price of RM1.30, (previously RM1.15) based on an unchanged valuation of 7.0x FY19E PER which is at the lower end of the 6-11x range which we ascribed to small-mid cap players. We pegged KIMLUN to the lower end of our valuation range in line with the smaller contractors and also due to their lower margins project mix.

Key risks for our call are: (i) higher/lower-than-expected margins, and (ii) acceleration/delay in construction works.

Source: Kenanga Research - 01 Mar 2019