1H19 CNP of RM29.4m came within our/consensus expectations, at 49%/48% 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. 1H19 core net profit (CNP) of RM29.4m came within at 49%/48% of our/consensus estimates. No dividend was declared, as expected.

Results’ highlights. YoY, 1H19 CNP grew 31% due mainly to surge in revenue (+47%) driven by manufacturing (+121%) and construction (+34%) divisions. This is mainly attributed to: (i) higher precast sales from KVMRT2, and (ii) higher progress billings from Pan Borneo Highway. QoQ, 2Q19 revenue grew marginally by 2% but its CNP fell 16% due to weaker GP margins from its manufacturing division, which saw GP declining to 16% (-3ppt) as bulk of its orders consisted of lower margin products.

Beneficiary of affordable housing and pre-cast play. 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 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 that 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 - 30 Aug 2019