Kimlun, one of the only two established suppliers of Mass Rapid Transit (MRT) precast concrete segments in Malaysia, is awaiting new supply tenders from MRT2. We cut our FY15-17 earnings forecasts by 8%, 4% and 4% respectively largely to factor in weakness in its building construction business in Johor. We trim our TP to MYR1.60 (30% upside) but maintain our BUY call.

Production of MRT2 segments may start in 2Q16. Kimlun expects the MMC (MMC MK, NR)-Gamuda (GAM MK, BUY, TP: MYR5.26) joint venture (JV) to issue notices of tenders for the supply of MRT2 precast concrete segments within the next 1-2 months. Kimlun hopes to secure “half if not at least a third” of the entire supply contracts. Kimlun’s key competitive advantages over its rivals are its track record in MRT1 and the huge storage space available at its Senawang plant. Its internal planning assumes production to start in 1Q16.

Guidance for construction job wins lowered. YTD, Kimlun’s construction division has bagged MYR554m new jobs, boosting its balance orderbook to MYR1.15bn. For FY15, Kimlun guided down potential construction job wins to MYR700m (from MYR700m-800m) and only set an FY16 construction job replenishment target of MYR500m-600m, amidst a slowdown in the property market in Johor.

Forecasts. We cut our FY15-17 earnings forecasts by 8%, 4% and 4% respectively largely to factor in lower annual construction job wins.

Risks to our view: i) Annual construction job wins in FY15-17F falling short of our assumptions of MYR700m, MYR550m and MYR800m respectively, and ii) failure to secure new MRT segment orders.

Maintain BUY. We project Kimlun’s net profit to grow by 6.5% and 12.3% in FY16 and FY17 respectively, underpinned largely by potential MRT2 precast concrete segment orders. Kimlun is a “must-own” stock along the value chain of the MYR80bn Klang Valley MRT project, given that it is one of the only two established suppliers of MRT precast concrete segments in Malaysia. We trim our TP to MYR1.60 (from MYR1.65) based on 10x revised fully-diluted FY16F EPS of 16.0 sen(from 16.5 sen), in line with our benchmark 1-year forward target P/Es of 10-12x for small-cap construction stocks. Kimlun’s P/E could easefurther to 6.1x in FY17F from an already attractive level of 6.9x in FY16F,on the back of 12.3% earnings growth in FY17F.

All Set For MRT2 Orders Highlights. Key takeaways from Kimlun’s analyst briefing last Friday are: i) Kimlun’sinternal planning assumes production for MRT2 precast concrete segments to start in 1Q16, and ii) it guided down potential construction job wins in FY15 to MYR700m (from MYR700m-800m) and only set a construction job replenishment target of MYR500m-600m for FY16 amidst a noticeable slowdown in the property market in Johor.

Production of MRT2 segments may start in 2Q16. Kimlun expects MMC-Gamuda JV to issue notices of tenders for the supply of MRT2’s segmental box girders (SBG) and tunnel lining segments (TLS) within the next 1-2 months. Kimlun expects “more competition” for the supply contracts – at least five players including Kimlun if the the precast concrete segment supply contracts for MRT2 could be slightly smallerthan MRT1 due to “the alignment” (which we believe Kimlun referred to less el evated sections as compared to MRT1). Recall that in 2012, Kimlun secured about half of MRT1’s precast concrete segment supply contracts in terms of value comprising TLS (MYR48.5m) and SBG (MYR223.2m). Both contracts were fully delivered by early 2015.

Kimlun hopes to secure “half if not at least a third” of the entire MRT2 precast concrete segment supply contracts in terms of value. Its key competitive advantages over its rivals are: i) its track record in MRT1 (Kimlun was one of the only two SBG/TLS suppliers for MRT1 – the other being privately-held Eastern Pretech (M) SB), ii) its 100-acre Senawang plant has huge storage space - which will come in handy if the MRT2 project runs into minor hiccups and as a result, the delivery of the segments to the sites has to be held back temporarily (this actually happened during the construction of MRT1).

Working on the basis that it will win some of the MRT2 precast concrete segmentsupply contracts, Kimlun’s internal planning assumes production to start in 1Q16. It expects utilisation of its Senawang plant to increase to 60-70% from 30-40% currently, upon commencement of production of the MRT2 orders. Originally invested for the purpose of producing SBG and TLS for MRT1, Kimlun is now using this new plant in Senawang as a second production plant to fulfill TLS orders from the MRT project in Singapore (Kimlun’s first plant located in Ulu Choh, Johor, is the main production plant for export sales to Singapore). The Senawang plant also produces industrialised building systems (IBS) largely used in the mass housing market . Our forecasts assume orders from MRT2 to start contributing to Kimlun’s bottomline from FY16.

Focusing on building jobs in the affordable segment. Meanwhile, YTD, Kimlun’s construction division has bagged MYR554m new jobs (a huge improvement over only MYR270m it secured for the whole of FY14), boosting its balance orderbook to MYR1.15bn. For FY15, Kimlun guided down potential construction job wins to MYR700m (from MYR700m-800m) and only set a construction job replenishment target of MYR500m-600m for FY16 amidst a noticeable slowdown in the property market in Johor. This compares with our job wins assumption of MYR800m pa in FY15-16.

Kimlun’s key focus area for new building jobs currently is in the affordable segment(vs the luxury high-rise segment 2-3 years ago). The affordable segment –comprising largely mid-priced apartments in the prime areas and landed homes in the outskirts – remains robust, driven by: i) the 1Malaysia Housing Programme (PR1MA), and ii) the front-loading of the launching of low-cost and medium-cost products by township developers. Kimlun also see opportunities for infrastructure and building jobs in the Refinery and Petrochemical Integrated Development (RAPID) project in Pengerang, Johor.

A government initiative, PR1MA, promotes home ownership in “key urban centres” for the middle-income group (defined as households with monthly income of MYR2,500-7,500) by ofering them to buy homes at prices subsidised by the Housing Facilitation Fund. Meanwhile, in response to the slowdown in the luxury segment of the property sector in Johor, many township developers are bringing forward the launching of low-cost and medium-cost products (typically make up 40% of total units of a township project) required under the Johor state laws. All these will translate tosustained new building jobs for building contractors in Johor including Kimlun.Forecasts. We cut our FY15-17 earnings forecasts by 8%, 4% and 4% respectively and MYR550m in FY15F and FY16F respectively (from MYR800m).

Risks to our view. These include: i) annual construction job wins in FY15F-17F falling short of our assumptions of MYR700m, MYR550m and MYR800m respectively, ii) failure to secure MRT2 precast concrete segment orders – which we assume at about MYR250m, and iii) weakdemand for its properties. Maintain BUY. We project Kimlun’s net profit to grow by 6.5% and 12.3% in FY16 and FY17 respectively, underpinned largely by potential MRT2 precast concrete segment orders. This will be on the heels of a 42.5% growth in net profit in FY15F,driven by improved construction job wins and a recovery in margins in both the construction and concrete products divisions. Based on our FY16 earnings forecasts, construction will contribute 46% of total gross profit, followed by concrete products (42%) and property development (12%). Kimlun is a “must-own” stock along the value chain of the MYR80bn Klang Valley MRT project, as it is one of the only two established suppliers of MRT precast concrete segments in Malaysia. We trim our TPto MYR1.60 (from MYR1.65), based on 10x revised fully-diluted FY16F EPS of 16.0sen (from 16.5 sen), in line with our benchmark 1-year forward target P/Es of 10-12x for small-cap construction stocks. Kimlun’s P/E could ease further to 6.1x in FY17F from an already attractive level of 6.9x in FY16F, on the back of an FY17F earningsgrowth of 12.3%.

Source: RHB Research - 5 Oct 2015