KIMLUN has secured a new contract worth RM204.4m from Rexpoint Resources Sdn Bhd for the construction of 2 blocks of apartment. Neutral over the win as it is well within our order-book replenishment assumption of RM700.0m. No changes in earnings. Maintain MP with higher TP of RM1.35 (previously, RM1.30) based on FY20E PER of 7.0x.

First win. Yesterday, KIMLUN announced that they have secured a contract from Rexpoint Resources Sdn Bhd worth RM204.4m, for the construction works of 2 blocks of apartment in Selangor which is expected to be completed by end Jan 2022.

Neutral on win. We are neutral on the win which is their first win for the year. The contract amount of RM204.4m falls well within our FY19E order-book replenishment assumption of RM700.0m. The contract win will bring its outstanding construction order-book to RM2.1b. Assuming a pre-tax margin of 6%, the contract would contribute RM3.3m to its bottom-line per annum.

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 of c.RM2.4b (construction RM2.1b; manufacturing RM0.3b) which should provide 2- year visibility.

Earnings review. No changes to FY19-20E earnings.

Maintain MARKET PERFORM with a higher Target Price of RM1.35, (previously RM1.30) based on 7.0x FY20E PER as we roll forward valuation base from FY19E, in line with our construction sector report. Our ascribed multiple of 7.0x is at the lower spectrum of the 6-11x range which we ascribed to contractors under our coverage. 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 - 30 Apr 2019