FY19 CNP of RM58.4m (-4% YoY) is within expectations, accounting for 97%/101% of our/consensus forecasts. The full-year performance saw weaker construction earnings being mitigated by better manufacturing profit. Maintain OUTPERFORM with a slightly lower SoP-derived Target Price of RM1.60 (from RM1.65 previously).

Within expectations. FY19 CNP of RM58.4m (-4% YoY) is in-line, representing 97%/101% of our/consensus expectations. The full-year results saw the construction division posting lower gross profit of RM80.9m (-8%) on the back of RM1.03b (+29%) revenue, of which was mitigated by stronger gross profit contribution of RM51.3m (+34%) from the manufacturing segment. The overall performance was dragged by lower gross margin for the construction (FY19’s 7.8% versus FY18’s 11.0% due to a higher mix of lower-margin projects) and manufacturing (FY19’s 13.8% versus FY18’s 15.2% arising from a larger proportion of the lower-margin precast concrete products) divisions.

Results’ highlights. 4QFY19 CNP of RM16.7m was up 36% QoQ but down 27% YoY. This came on the back of: (i) the construction division registering gross profit of RM24.5m (+58% QoQ/-20% YoY), and (ii) the manufacturing segment recording gross profit of RM13.3m (+8% QoQ/- 8% YoY). The final quarter was also affected by higher effective tax rate of 29.1% (versus 3QFY19’s 21.4% and 4QFY18’s 24.2%). The company has proposed DPS of 3.3 sen, translating to a dividend yield of 3.0%.

Outlook. Forward earnings will be underpinned by outstanding order book of RM1.3b of construction jobs (anchored mainly by the Pan Borneo Highway Sarawak project) and RM0.24b of manufacturing orders as of end-Dec 2019.

Tweaking our earnings. We have fine-tuned our net profit forecast to RM65m (+5%) for FY20 and introduce our projection of RM63m for FY20 after tweaking our assumptions mainly on timing of progress billings and margin assumptions.

Maintain OUTPERFORM with a lower Target Price of RM1.60 (from RM1.65). Our TP is derived from SoP-valuation method (see table overleaf), which implies P/E multiple of 8.4x on FY20 earnings. 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 - 28 Feb 2020