Kimlun Corporation : A soft patch expected in FY17F BUY

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Kimlun Corporation : A soft patch expected in FY17F       BUY

We cut our FY17F and FY18F forecasts by 18% and 3% respectively, downgrade our FV by 10% to RM2.40 (from RM2.65), but maintain our BUY call. This follows Kimlun's cautious guidance for its earnings outlook during an analyst briefing yesterday. Our FV is based on 11x revised FY18F FD EPS, in line with our 1-year forward target PE of 10-12x for small-cap construction stocks. Kimlun guided for weaker earnings in FY17F against FY16 (vs. our projection of +5.9% earnings growth in FY17F). We trim our assumptions on construction margins during our forecast period, as well as manufacturing sales in FY17F. We now project Kimlun’s FD EPS to contract by 19.9% in FY17F, but subsequently bounce back by 19.8% in FY18F, driven largely by the recovery in manufacturing earnings as production and delivery of the MRT2 and ERL orders gather momentum.

Kimlun is a good proxy to the booming local construction sector given its involvement in the MRT2 (supply of precast concrete segments), Pan Borneo Highway and the construction of affordable housing. Its earnings visibility is strongly underpinned by construction and manufacturing order backlogs of RM1.67bil and RM260mil respectively, which will keep it busy for the next 12-18 months. Its earnings profile has improved tremendously as it no longer relies solely on residential building jobs, but has expanded to the construction of a hospital (Gleneagles Medini, RM105mil), a shopping mall (IGB's Southkey Megamall, RM38mil) and hostels (Sime Darby's Pagoh Education Hub, RM38mil), as well as infrastructure (a section of Pan Borneo Highway, RM1.46bil, via a 30%-owned JV with Zecon). Similarly, its manufacturing unit has widened its product offering with the latest being rail sleepers and parapet walls.

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