1Q19 CNP of RM15.9m came within our/consensus’ expectations, at 26% of estimates, and as expected, no dividend was declared. FY19-20E earnings of RM60.4-61.9m kept unchanged. Maintain MARKET PERFORM with an unchanged Target Price of RM1.35.

Within expectations. 1Q19 core net profit (CNP) of RM15.9m came within at 26% of both our/consensus estimates. No dividend was declared, as expected.

Results’ highlight. YoY, 3M19 registered CNP of RM15.9m (+26%) mainly due to surge in revenue (+44%) driven by manufacturing (+204%) and construction (+24%) divisions. This is mainly attributed to: (i) higher precast sales from KVMRT2, and (ii) higher progress billings from Pan Borneo Highway. EBIT margin slightly compressed to 8% (vs. 3M18: 9%) due to an increase in depreciation (+59%) on more machinery for Pan Borneo. QoQ, despite 1Q19 revenue of RM318.6m (+3%), CNP declined (-31%) to RM15.9m (vs. 4Q18 CNP of RM22.9m) as construction GP margin normalised (-5ppt) to 8%. Note that 4Q18 construction’s GP margin was significantly higher at 13%, benefiting from cost savings from value engineering on certain projects.

Buoyed by affordable housing and sale of precast. Moving forward, KIMLUN’s outlook should be buoyed by the affordable housing segment which we estimate should yield high single-digit to low-teens GP margins. Its manufacturing division should continue to see steady delivery of its precast concrete products with higher sales mix from lower margin KVMRT2’s Segmental Box Girders. All in, while we anticipate higher construction billings from Pan Borneo Highway (progress c.55%), FY19 should see slight margin compression, premised on the reasons above. KIMLUN’s outstanding order-book stands at c.RM2.0b (construction RM1.7b; manufacturing RM0.3b) which should provide 2-year’s visibility.

No changes to our FY19-20E earnings of RM60.4-61.9m.

Maintain MARKET PERFORM with an unchanged Target Price of RM1.35 based on the 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 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 - 31 May 2019