KimLun Corporation - Downtrend in Share Price Unjustified

KimLun’s 1HFY12 core earnings of RM25.4m were 53.4% and 54.5% of our and consensus full year estimates. We deem this as in line with expectations as its financing costs would likely creep up in 2HFY12 on the drawdown of borrowings to fund its working capital requirements. With its outstanding orderbook solid at an estimated RM1.5bn, we continue to like the company, with our FV upgraded slightly to RM2.48 based on 10x FY13 PE. Maintain BUY.

Speedier revenue recognition offset by blip in margins. KimLun’s 1HFY12 revenue came in at RM446.1m, beating both our and consensus estimates at 60.0% and 55.8% of the respective annual estimates owing to faster-than-expected recognition of construction works during the period. Core earnings, however, came within both the estimates at RM25.4m, as the EBIT margin retreated 590bps to 8.2% due to the recognition of lower-yielding projects in 2QFY12. On a quarterly basis, the 2QFY12 revenue of RM247.8m is a stellar growth of 49.7% y-o-y and 24.9% q-o-q while net profit surged 26.0% y-o-y and 38.9% q-o-q to RM14.7m.    

Fine-tuning forecasts. We revisited our model and tweaked our assumptions to account for the speedier recognition of KimLun’s construction works for the remainder of this year. With that, our topline estimate is bumped up by 15.3% for FY12 while the FY13 forecast is trimmed by 1.5%. We have also revised our FY12f core earnings upward marginally by 1.3% to RM48.2m to factor in the lower construction margins that were witnessed in 1HFY12, while our FY13f core earnings have been revised downwards by 5.7%. We also take the opportunity to introduce our FY14 forecasts with a net profit estimate of RM64.2m. 

BUY. Despite the decent set of 1HFY12 results, KimLun’s share price has retreated by some 17.2% since March this year. Although FY12 margins would likely clock in lower y-o-y due to the procurement of machinery for its precast division, we deem the downtrend as unjustified given its strong YTD job winnings of RM794m. We see this as an opportunity to increase a position in the company and hence, maintain our BUY call. Rolling forward our valuation to FY13 based on a revised 10x PE (from 12x previously, to account for likely lower margins as well as higher leverage to fund its working capital requirements), our FV now stands at RM2.46, from RM2.37 previously.

Source: OSK