9MFY19 CNP of RM41.7m accounted for 69% each of both our and consensus full-year forecasts. This is deemed within expectations as 4QFY19 could come in stronger sequentially on the back of healthy order-book. No dividend was declared. Maintain our FY19-20E earnings. Upgrading our call to OUTPERFORM with a higher Target Price of RM1.65 (from RM1.35 previously) based on a FY20E PER of 8.6x (+1SD above mean).

Within expectations. 9MFY19 CNP of RM41.7m (+9% YoY) is in-line at 69% each of both our and consensus estimates. No dividend was declared, as expected.

Results’ highlights. YoY, 9MFY19 CNP was lifted by stronger contribution from the manufacturing segment (which saw a surge of 59% in gross profit) on the back of higher sales for precast concrete and quarry products. This more than offset the broadly flattish performance of the construction business despite a higher turnover as construction margin eased from 10% to 7% due to a lower margin project mix. QoQ, 3QFY19 was depressed by lower construction contribution arising from margin compression which more than offset better quarterly earnings from the manufacturing segment.

Outlook. The Group has an outstanding order-book of RM1.5b of construction jobs (anchored mainly by the Pan Borneo Highway Sarawak project) and RM0.24b of manufacturing orders as of end-Sep 2019. This is expected to underpin forward earnings.

Our FY19-20E earnings are intact. We are keeping our net profit forecasts of RM60.4m for FY19 and RM61.9m for FY20 as we expect 4QFY19 performance to come in sequentially stronger on account of progress billings from its healthy order-book.

Upgrade to OUTPERFORM with a higher Target Price of RM1.65 (from RM1.35). Our TP is derived using a PE multiple of 8.6x (or at 1SD above its historical mean) after rolling over our earnings base to FY20E. We like Kim Lun as a small-cap contractor play which also offers exposure to the affordable housing segment and rising construction activities in Singapore.

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

Source: Kenanga Research - 29 Nov 2019