Still delivering on earnings

• In-line 3Q16 performance
• Strong orderbook of RM2.1bn
• Still optimistic of more jobs this year
• BUY, TP of RM2.87 based on 10x FY17F EPS

What’s New

Within expectations

Kimlun booked a 3Q16 headline net profit of RM17m (- 16% y-o-y, -32% q-o-q), bringing 9M16 net profit to RM58m (+17% y-o-y). This is on the back of a 14% decline in 9M16 revenue to RM705m. The lower profit for this quarter was expected and the results were in line with our and consensus estimates.

Lower construction revenue

3Q16 construction revenue was 9% lower y-o-y at RM185m but flat q-o-q. On a 9M16 basis, revenue fell 20% to RM558m. This was due to the fact that the new projects secured YTD are mostly in the preparatory stage and have yet to contribute. Similarly, 3Q16 manufacturing revenue dropped 5% y-o-y and 33% q-o-q to RM40m. This was due to lower sales orders for the supply of tunnel lining segments for Singapore’s underground power transmission network, as this was largely completed in 2Q16. However, 9M16 manufacturing revenue rose 3% to RM148m due to higher sales of industrial building components to RAPID projects.

Gross margins held up

For 3Q16, Kimlun delivered a gross margin of 13.7% vs 16.4% in 2Q16 and 12.8% in 3Q15. The better margins for this quarter compared to a year ago was due to higher construction margins of 10.4% in 3Q16 (vs 9.2% in 3Q15) from better execution of contracts, lower raw material price and fuel price. Its manufacturing margin for 3Q16 was 27.9% vs 30.7% in 3Q15 and 34.6% in 2Q16. We expect margins to trend lower as it recognises the Segmental Box Girder contract for MRT Line 2.

Construction division on firm ground. Its total outstanding orderbook now stands at c.RM2.1bn (RM1.78 construction and RM0.28bn manufacturing). The largest project is its PBH Sarawak project (Serian Roundabout to Pantu Junction). It has a 30% interest in the JV company which was awarded this contract where Zecon owns the balance 70%. At the last analyst briefing in September, Kimlun remained hopeful of additional wins of RM200-300m before the year is over. This will likely come from a mixture of Klang Valley and Johor-based affordable housing projects.

Some of the strategies for its construction division going forward include: i) targeting non-residential projects, where existing projects include Gleneagle Medini Hospital, JB Southkey Megamall, Pagoh Education hub and Religious building; ii) bidding for more infrastructure-related projects (highway, RAPID, PBH), and iii) looking for opportunities outside of Iskandar Malaysia.

Source: Alliance Research - 30 Nov 2016