Malaysia Industry Focus Construction - DBS Bank Corp : Construction, property development, plantations WCT Holdings Bhd : Construction, property development and operation of toll roads

ed-TH / sa- BC

2016 – The year to shine

2016 to see award of major projects

Minimal correlation between consensus earnings and share prices implying some optimism priced in

Valuation expansion depends on timing of awards

Top picks – Gamuda, Muhibbah, Kimlun Time to shine. Amidst the more challenging economic backdrop, the construction sector is one of the few likely areas of growth left locally; implying pump priming the economy is imminent. The higher development expenditure for the 11MP (RM260bn over five years) together with the commitment shown in Budget 2016 should provide assurance that the validity and timeline of projects remain intact. Among the large mega projects, the focus will be on high-multiplier projects with low import content. In our view, this will be MRT Line 2, LRT 3 and highway projects like WCE, DASH and SUKE. Hence, contractors which are associated or are deemed front runners are safer bets – Gamuda and IJM.

Timing of awards is key. Without the presence of a fresh mega project besides the High Speed Rail where details are still sketchy, the focus will be on timing of awards. For MRT 2, some tenders have already occurred in 4Q15 but the majority of awards of works will be in mid-2016. We also expect the surge in project awards to filter to the manufacturing space. Kimlun is the biggest beneficiary of manufacturing of concrete products (TLS and SBG) while all listed bore piling companies will have a role to play for all transportation-related projects which require bore piling work.

Consensus earnings. We have seen little correlation between consensus earnings and share prices implying some optimism has been priced in. Overall we have seen an average cut of 13% and 17% for 2015 and 2016 earnings. While this may indicate fairly muted expectations, there is little room to surprise on the upside given most project flows are well known and would have already built in the benign cost environment.

Room to trade higher. The KL Construction Index is trading at mean levels in terms of PE and P/BV, which in our view factors in potential delays and Malaysia’s fiscal position, placing the financing of some projects in question. Depending on the timing of awards and the ability to convert contracts into earnings, we think the sector has room to trade higher, possible testing +1SD valuations it commanded during the onset of 10MP. We reiterate our BUY rating on Gamuda, Muhibbah and Kimlun. Gamuda is the most complete transportation infra proxy in Malaysia which is a key theme for 2016. Muhibbah’s infra orderbook looks more solid now with strong wins in 2015. Kimlun remains a ‘must-own” MRT proxy.

KLCI: 1,655.13

Analyst Tjen San Chong +603 2604 3972 [email protected]

STOCKS

Source: Alliance DBS

Gamuda : Construction, property development and operation of toll roads

IJM Corp : Construction, property development, plantations

WCT Holdings Bhd : Construction, property development and operation of toll roads

Muhibbah Engineering : Construction, cranes manufacturing, shipbuilding and Cambodian Airports concession

Kimlun Corp : Construction with a niche in IBS. Also manufactures concrete products.

Ikhmas Jaya Group : Civil engineering works with focus on piling and foundation, bridges and buildings

KL Construction Index – PE trading ranges

-2SD

-1SD

Mean

+1SD

+2SD

7.0

9.0

11.0

13.0

15.0

17.0

19.0

21.0

23.0

2-Ja

n-09

2-Ju

l-09

2-Ja

n-10

2-Ju

l-10

2-Ja

n-11

2-Ju

l-11

2-Ja

n-12

2-Ju

l-12

2-Ja

n-13

2-Ju

l-13

2-Ja

n-14

2-Ju

l-14

2-Ja

n-15

2-Ju

l-15

PE (x)

Source: AllianceDBS, Bloomberg Finance L.P

DBS Group Research . Equity 11 Jan 2016

Malaysia Industry Focus

Construction

Refer to important disclosures at the end of this report

Price Mkt Cap Target Price Performance (%)

RM US$m RM 3 mth 12 mth Rating

Gamuda 4.61 2,522 5.60 1.3 (7.2) BUY IJM Corp 3.32 2,699 3.30 0.6 0.8 HOLD WCT Holdings 1.64 445 1.48 11.6 10.5 HOLD Muhibbah 2.24 239 2.90 (0.4) 28.7 BUY Kimlun Corp 1.52 104 2.05 15.2 28.8 BUY Ikhmas Jaya 0.68 N/A 0.90 1.5 N.A NR

Industry Focus

Construction

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Public sector to drive growth in 2016

According to the Economic Report 2015/16, the government’s development expenditure for 2015 will grow by 20% to RM47.4bn or 4.1% of GDP. This is slightly less than the RM48.5bn expected in the Economic Report 2014/15. The strong growth is expected given it represents the last year of the Tenth Malaysia Plan (10MP). For 2016, the government has set aside RM50bn in development expenditure, translating into a growth rate of 5.4% y-o-y and 4% of GDP. This will be the first year of the Eleventh Malaysia Plan (11MP) where development expenditure is set at RM260bn over the next five years. Unlike in previous years, we think the public sector will be the key driver of project flows in 2016 but there could also be a resurgence of private sector property jobs if the market recovers. According to data from CEIC, the private sector was the key driver of construction spending at >80% over the past three years. Construction spending as percentage of GDP

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

0

5

10

15

20

25

30

35

40

45

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

RMbn

Construction spending (LHS) % of GDP (RHS)

Source: CEIC AllianceDBS

Construction spending drive by private/public sector over last few years

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

20

40

60

80

100

120

140

160

180

2007 2008 2009 2010 2011 2012 2013 2014 1H15

RMbn

Projects awarded (LHS) Government (RHS) Private (RHS)

Source: CEIC AllianceDBS

2016 to be a busy year for awards The higher development expenditure for the 11MP (RM260bn over the next five years) together with the commitment shown in 11MP and Budget 2016 should provide assurance that the validity and timeline of projects remain intact. With no new mega project likely to act as a catalyst, we think the market will focus on the timely execution of tenders and awards. More importantly, we think progress of key high-multiplier projects appear to be moving. DASH and SUKE have completed the prequalification phase. Recently, MRT Corp received the final approval from the Land Public Transport Commission (SPAD) to carry out the construction of MRT Line 2. MRT Line 2 The Sungai Buloh-Serdang-Putrajaya (SSP) or MRT Line 2 will serve a corridor with a population of around 2m people, stretching from Sungai Buloh to Putrajaya and will include Sri Damansara, Kepong, Kampung Batu, Jalan Sultan Azlan Shah, Jalan Tun Razak, KLCC, Tun Razak Exchange, Kuchai Lama, Seri Kembangan and Cyberjaya. The proposed length is 52.2km of which 13.5km is underground. A total of 36 stations, 11 of them underground, will be built. At commencement of full service in 2Q2022, the SSP Line is expected to have a ridership of 529,000 passengers per day. MRT Corp has received the final approval from the Land Public Transport Commission (SPAD) to carry out the construction of MRT Line 2. The federal endorsement by SPAD entails among others, the final alignment as well as location of the stations. MRT Line 2 will have 37 stations - 25 elevated, 11 underground, and one which is built on ground below the current level. The majority of above-ground awards will be after April/May 2016. As for tunnelling, the tenders will close in January 2016 and be awarded in mid-2016. PDP fees have been set at 6% (similar to Line 1) but with three additional KPIs which will constitute about half a percentage point of the 6%. This will be for safety, quality and response to public. We expect contractors present in MRT Line 1 above ground to be front runners for MRT Line 2 package. This will be particularly so for the contractors which are ranked highly (IJM and Sunway). Also for MRT Line 2 above ground, there will be 10 Viaduct packages as compared to 8 for MRT Line 1. Kimlun will also likely receive a substantial share of the tunnel lining

Industry Focus

Construction

Page 3

segment (TLS) and segmental box girders (SBG) contracts for MRT Line 2. MMC-Gamuda will very likely return as tunnelling contractor for MRT Line 2, having acquired the expertise for Line 1 and has a cost advantage with the 10 depreciated tunnel-boring machines. LRT 3 As for LRT 3, the appointment of MRCB-George Kent for the PDP role will see more concrete tenders and awards in 2016. The prequalification process should have been completed by December. The PDP will receive a fixed fee of 6% paid on a quarterly basis and not participate directly in the civil works. West Coast Expressway WCT was recently awarded a RM282m contract from IJM for subcontracting works for Section 3,4,5,8 & 9 for WCE. The scope of works consists of site clearance and earthworks, geotechnical works, drainage works and box culverts, sub-base, road base and pavement, traffic signs, road markings and road furniture, utilities and services, erosion control sediment plan, environmental protection and enhancement. We understand tenders from the RM2.2bn open tender portion for packages 1, 2, 6, 7, 10 and 11 will be called from early 2016 onwards. High Speed Rail Malaysia's and Singapore's land transport regulators (SPAD and LTA) said they received 98 submissions in response to the request-for-information exercise for the High Speed Rail (HSR) project. They include companies from Malaysia, Singapore, the Asia-Pacific, Europe, the Middle East and North America. Of the 98 submissions, there were 13 from Malaysia and four from Singapore. SPAD and LTA’s CEOs were quoted as saying that the governments of Malaysia and Singapore expect to finalise the commercial model and procurement approach of the project by 2016. Prime Minister Najib has also confirmed China’s interest in the HSR following the signing of the eight G-to-G MOU. The sale

of 1MDB’s power assets to China General Nuclear Power Corp for RM9.83bn and China Railway Engineering Corp. involvement in Bandar Malaysia could be a precursor to more Chinese involvement in Malaysia’s mega infrastructure projects like the HSR. At the recent China High Speed Railway symposium in KL, 14 companies were shortlisted to present their views on the project. Apparently, the companies are France’s Alstom SA, Germany’s Siemens AG, Spain's CAF and Talgo SA, Canada’s Bombardier, China Railway and consortiums from South Korea and Japan. SPAD is also exploring the use of Transport Oriented Development (TOD), which is a mixed-use residential and commercial area aimed at maximising access to public transport along the HSR line. According to a local daily as reported in early January 2016, both the Malaysian and Singaporean governments have agreed on the alignment and have decided on two services – a direct service (90 minutes) and another with transit stops (Bandar Malaysia, Seremban, Melaka, Muar, Batu Pahat and Nusajaya which will take two hours). MyHSR Corp which is the project delivey vehicle for the HSR was also quoted in saying that they are still in the midst of discussions with Singapore on key issues such as approach to tendering and whether it will be a government design-and-build contractor model. We are more generally more skeptical on the eventual rollout of the HSR as we think the priority will remain on MRT Line 2 and the circle line. In all likelihood, there will have to be strong private sector involvement and foreign participation and financing. Nonetheless, we expect local contractors which have some of expertise in rail-related works gathered from the LRT and MRT to have a role. In particular, we think Gamuda and YTL would be frontrunners to lead the local contractors. Pan Borneo Highway The government also reiterated its commitment to the Pan Borneo Highway which will be toll free. To note, the Sarawak portion costing c.RM16bn has been progressing with the appointment of the PDP role to Lebuhraya Borneo Utara for the 1,090-km stretch. We understand that work has already started at some portions, which is the 43-km-long Nyalau-Bakun Junction Road in Bintulu. We expect the key beneficiaries to be the Sarawak-based players, CMSB, Naim Holdings and Hock Seng Lee. The 706-km Sabah portion

Industry Focus

Construction

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costing RM12.8bn from Sindumin to Tawau will start construction in 2016.

The prequalification works for Pan Borneo highway have been completed with 15 contractors shortlisted. We understand West Malaysian-based contractors can only have a maximum equity of 30%.

Penang Transport Master Plan

Gamuda has received a Letter of Award (LOA) - via SRS Consortium - from the Penang State Government to be PDP for the Roads and Public Transport Projects in Penang (Penang Transport Master Plan Strategy 2013-2030). The shareholding structure is as follows: Gamuda (60%), Ideal Property Development (20%), and Loh Poh Yen Holdings (20%). We expect finer details on this project to surface only in early 2016 when the PDP agreement is officially signed. The key hurdle for this project is obtaining federal government approval for land reclamation and for the LRT. This is expected to only happen at end-2016, implying physical works to start in 2018. Gamuda is hoping to have two bites of the cherry – being PDP, and also turnkey contractor for some key components, but that is still uncertain at this stage. Based on our DCF value for its PDP portion which assumes 5% PDP fee, Gamuda’s 60% share of the RM27bn contract, and the project running from 2017 to 2030, our SOP value could increase by c.RM1.00/share. There has been more newsflow on the project lately. The components are an LRT from Komtar to Bayan Lepas, a monorail from Komtar to Air Itam and Tanjung Bungah, e-buses across North Channel, bus rapid transits on the mainland and a 20-km Pan Island Link Highway connecting Tanjung Bungah to Penang International Airport and Tun Dr

Lim Chong Eu Expressway (LCE) with tunnels cutting through the hills. The first components are supposed to be the LRT (which is 20km in length) and the Pan Island Link Highway, given their high economic IRR of 12.2% and 14% respectively. The media also highlighted the plan to claim two islands in the south of Penang Island, which will be fully owned by the Penang government. The land will then be auctioned to finance the project. The estimated cost for reclaiming two islands of 1,300 acres and 2,100 acres respectively is RM7-8bn. This works out to be RM47-54 psf as compared to E&O’s reclamation cost at Seri Tanjung Pinang of RM90-RM140psf. The previously speculated land to be reclaimed in Middle Bank is not likely to happen given the strong protests from environmentalists and civic groups. We understand that so far discussions with the relevant parties have been encouraging. The environmental and social impact assessment studies have commenced together with alignment optional studies. The Penang Exco has also recently approved the PDP’s involvement in the project. With this, the PDP will table the railway scheme (LRT) to SPAD and a master plan will be tabled to SPAD within six months. Once this is completed, the alignment will be put up for public display.

Industry Focus

Construction

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List of potential contracts in the pipeline

A mount (RMbn) Potent ial w innersT ransport related inf ra spendingMRT Line 2 and 3 56.0 Gamuda, MMC, IJM, Sunway, WCT, MuhibbahPenang Integrated Transport 27.0 Gamuda. IJM likely to have subcon roleKL Bullet Train to Singapore 40.0 Gamuda, YTL, foreign based contractorsLRT 3 10.0 MRCB-George Kent and other local contractors6 new highways 19.0 VariousPan Borneo Highway 27 CMS, Naim, HSL, other West Malaysian playersGemas-JB double tracking 8 Fajar Baru, Gamuda, IJM, WCTJalan Tun Razak traffic dispersal 0.9 VariousSub total 187.9

Dev elopment related inf ra spendingRRIM Land 10 MRCB, Various building contractorsTun Razak Exchange 26 WCT, Various building contractorsWarisan Merdeka 5 UEM-SamsungPudu Jail 5 VariousKampung Baru Redevelopment 43 VariousSubtotal 89

OthersPetronas RAPID 62 Muhibbah, Ho Hup, WCT, Gadang, othersKlang River Rev italisation 18 MRCBKK Water Supply Scheme 2.8 WCTNorthport, Westport and Samalaju Port 1 MuhibbahSubtotal 83.8

Total 360.7Source: AllianceDBS, Various Sources

Industry Focus

Construction

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Stock picks

We advocate sticking to stocks which have associations with projects with clearer visibility – MRT Line 2, LRT 3 and WCE. An alternative proxy to the sector is via the piling companies where we in 2015 issued an Equity Explorer note on Ikhmas Jaya. Gamuda We expect Gamuda to solidify its position for MRT Line 2 with the eventual award of tunnelling works by mid-2016 adding another RM6bn of high-margin works. Tenders for above-ground works for MRT Line 2 have also kicked off but the majority will also be in mid-2016. Gamuda’s PDP role will see another RM8bn of orderbook with a PDP fee of 6%. We also sense the company will be more aggressive in other transport-related tenders like LRT 3, Pan Borneo Highway, Southern Double tracking and eventually the High Speed Rail. The resolution of Splash, where negotiations are ongoing, is expected to be by 3Q-4QCY16. While we do not expect a special dividend, the monies will be vital for ensuring the timely rollout of its Penang Transport Master Plan project. We expect finer details on this project to surface only in early 2016 when the PDP agreement is officially signed. The key hurdle for this project is obtaining federal government approval for land reclamation and for the LRT. This is expected to only happen at end-2016, implying physical works would start in 2HCY17. Gamuda is hoping to have two bites of the cherry – being PDP, and also turnkey contractor for some key components, but that is still uncertain at this stage. Gamuda remains the best large-cap transportation infrastructure proxy in Malaysia. In our view, the market has already priced in the expected decline in FY16F earnings given there will be timing gap before MRT Line 2 starts to contribute. We maintain our BUY rating and TP of RM5.60. IJM IJM is sitting pretty with a record orderbook of RM7bn. This puts it in an enviable position to be more selective in bidding for projects going into 2016. The company is still eyeing various projects from the 11MP such as more specialist works for DASH and SUKE, parts of Pan Borneo Highway and MRT Line 2. Tenders for the remaining packages for WCE (Packages 1, 2, 6, 7, 10 and 11) will commence from early 2016 onwards while there is a host of other internal jobs from Light Phase 2 and other portions of Kuantan Port expansion. It will

also try to free capacity by accelerating progress of works in order to capitalise on more flows and the benign raw material environment. Two overlooked divisions of the group are its industries and port divisions which showed strong 2QFY16 results. 2QFY16 pretax profit for industries rose 16% y-o-y but eased slightly q-o-q to RM38m. We expect orderbook visibility to increase as progress of works for WCE and Kuantan Port expansion increases where total orders for both projects is estimated at RM270m. It is also seeing higher orders from overseas, particularly from Myanmar and Brunei. Kuantan Port returned a stellar performance with pretax profit of RM81m, bringing 1HFY16 profit to RM147m (vs RM64m in 1HFY15). This was driven by higher throughput of 20m FWT for 1HFY16 which is just slightly lower than the 23 FWT achieved for the whole financial year of 2015. WCT WCT's 2015 wins have reached c.RM3.1bn while its current external outstanding orderbook is now estimated at RM4.4bn. We are encouraged that the majority of its recent wins have been earthwork- and infrastructure-related which carries higher margins while also gives it flexibility to value engineer to raise margins. Despite the stronger construction wins, we remain concerned on its deteriorating property sales and high gearing levels. YTD sales until September 2015 amounted to RM307m and it will not meet its RM584m sales target (which has been lowered once already). The sales rates for its older projects, Laman Greenville and Sky Jelutong have not really picked up, at just 25% and 16% respectively since their launch in 2014. WCT’s net gearing as at 30 September 2015 stood at 0.75x. Cash flow requirements over the next few years are also high, given the aggressive expansion of its malls (Paradigm Johor and Paradigm OUG). Moreover, its recent RM755m contract win in TRX is non-cash flow generating as the proceeds will go towards payment for the land. Muhibbah Our main concern with Muhibbah previously was its waning infrastructure orderbook. This has since been addressed where its infrastructure orderbook now stands at RM1.9bn (2.3x FY15F revenue). Its most recent win was a RM300m RAPID contract from Petronas. This contract brings Muhibbah's YTD wins to c.RM1.3bn. It also represents its fourth contract win

Industry Focus

Construction

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for RAPID, validating our view on it being a strong RAPID proxy. The tenure of the contract starts immediately and will be completed in November 2016. For 9M15, margins for construction have also improved to 6% from 4% in 9M14 and we expect some continued improvement going forward as the nature of wins has been more marine and fabrication based. For 3Q15, its Cambodian airport concession pretax profit grew to RM14.9m (+41% y-o-y, +29% q-o-q). Similarly, 9M15 pretax profit also higher by 30% y-o-y to RM44m. This was driven by strong traffic volume growth of +15% y-o-y to 4.7m passengers while also lifted by an appreciating USD. The expansion plans for its Siem Reap and Phnom Penh airports have been largely completed with capacity now double at 12m. We continue to like Muhibbah as a solid all round proxy to the 11MP with its varied expertise in civil engineering, marine-based construction and oil & gas-related construction works. We maintain our BUY rating and TP of RM2.90 based on SOP. Kimlun Kimlun’s earnings delivery has been exceptional for 2015. 3Q15 results were strong where 9M15 core earnings came in at 86% of our forecast. This was also on the back of strong margins where 3Q15 gross margin was 12.8% (vs. 10.6% in 2Q15 and 8.6% in 3Q14), largely because of higher margins derived by the construction and manufacturing segments. 2016 will likely be a busy year for its manufacturing division with potential wins for Eastern Region Line (ERL) and MRT Line 2. The group’s manufacturing arm will continue to benefit from the Singapore market, where more contract wins for

MRT works could be forthcoming. For MRT Line 1; Kimlun has secured c.50% market share of segmental box girders (SBG) and tunnelling lining segment (TLS) worth RM272m in total (RM223m SBG and RM49m TLS). Its outstanding orderbook in total was RM1.14bn as at 30 Sep (RM0.94bn construction, RM0.2bn manufacturing). Kimlun is the most assured MRT proxy apart from Gamuda as we expect the company to win its fair share of TLS and SBG works. Our target price of RM2.05 is based on 11x CY16 EPS which is less than +1SD of its historical mean PE multiple of 11.7x. Ikhmas Jaya

Ikhmas Jaya Group Bhd (Ikhmas) is a bore-piling specialist for piling & foundation works. It also has expertise in building superstructures for bridges, buildings and prefabricated building system (PBS). Some of its key projects are Prai Bridge, KV MRT 1, Kelana Jaya LRT, Paradigm mall and KL Eco City. Ikhmas’ prospects remain bright given its strong presence in the public sector where contract flows are expected to surge in 2016. Its proven track record with MRT and LRT as well as highway projects will put it in good stead to secure the slew of large-multiplier projects such as MRT 2, LRT 3 and highway projects like DASH, SUKE, DUKE 2 and EKVE. Its current outstanding orderbook of c.RM220m gives it adequate visibility till 1H16 but we see this growing exponentially in 2016 driven by its strong tenderbook of RM3.5bn. Our indicative fair value of RM0.90/share is based on 10x FY16F EPS, an adequate 25% discount to the construction average.

Sector Comparison

Market Cap Rec. TP

(USDm) (Local currency ) CY15 CY16 CY17 CY15 CY16 CY17 CY15 CY16 CY17 CY15 CY16 CY17Malay siaGamuda 2,606.1 BUY 5.60 17.1 17.3 16.0 1.7 1.6 1.5 1.9 1.9 1.9 4.0 4.2 4.0IJM 2,808.5 HOLD 3.30 20.5 18.6 17.4 1.4 1.4 1.4 3.3 3.3 3.3 5.5 3.3 3.3WCT 446.6 HOLD 1.48 11.9 17.6 17.1 0.8 1.1 1.1 2.1 2.1 2.1 9.6 2.5 6.0Muhibbah Eng 240.8 BUY 2.90 10.2 8.3 7.7 1.3 1.2 1.2 2.0 2.4 2.6 13.4 6.0 14.3Kimlun 96.4 BUY 2.05 8.8 7.6 7.1 0.9 0.8 0.8 2.7 3.5 3.7 13.4 5.7 13.4A v erage 13.7 13.9 13.1 1.2 1.2 1.2 2.4 2.6 2.7 9.2 4.4 8.2

Diluted PE (x ) P/NT A (x ) Net Div Y ield (%) ROE (%)


Industry Focus

Construction

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Performance of selected construction stocks

Source: Bloomberg Finance L.P, AllianceDBS The funding conundrum The construction sector in Malaysia has historically been a localised sector where foreign participation is only present when the required expertise is needed or it comes with the associated funding requirements. However going forward, we expect to see more foreign participation in the Malaysian construction space. A case in point is the HSR where 14 companies have been shortlisted to present their case to SPAD. Among them are companies from France, Germany, Spain, Canada, China, South Korea and Japan. In our view, the sale of 1MDB’s power assets to China General Nuclear Power Corp for RM9.83bn and China Railway Engineering Corp’s involvement in Bandar Malaysia could be a precursor to more Chinese involvement in Malaysia’s mega infrastructure projects like the HSR. Moreover, we understand that regionally, China’s involvement in infrastructure projects in ASEAN comes with the most competitive funding structure.

A prime example is the HSR from Jakarta to Bandung, where China beat Japan largely due to the more competitive funding put in place. The Gemas to Johor Bahru or southern double tracking is rumoured to be awarded to an entity headed by China Railway Construction Company. We think this is a ‘win-win’ situation in Malaysia as the government’s current finances and budget deficit will render it unlikely to be able to fund another large-scale project besides the MRT. Even with higher foreign participation, local contractors will continue to benefit but will have to settle for a subcontractor role. The establishment of the Asian Infrastructure Investment Bank (AIIB) in 2015 should also provide assurance that there will be ample liquidity to fund larger-scale projects in the region. AIIB is an international financial institution which is focused on supporting infrastructure construction in the Asia-Pacific region. The bank was proposed as an initiative by the government of China.

Industry Focus

Construction

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Consensus earnings and share prices Consensus earnings for FY15, FY16 and FY17 are on average down by 13%, 17% and 15% respectively since the start of 2015. On average, our universe of construction stocks is up by 9% for the year. We think this implies some optimism has been priced in for 2016. In particular, WCT has seen the steepest cut (FY15F – 41%, FY16F -34%) given the lacklustre earnings delivery thus far which has been lifted by forex gains. On the flipside, the only contractor which has seen positive earnings revisions is Kimlun where FY15F and FY16F earnings were revised up by 12% and 2% respectively. Its share price, together with Muhibbah's, has been the strongest, both up 24% for 2015. Note that our forecast earnings are generally in line with consensus.

Summary of EPS revisions and share performance YTD

GAM IJM WCTHG MUHI KICB

- - -40.7% -10.9% 16.9%

-20.1% -22.3% -34.3% -11.8% 6.3%

-15.2% -21.1% -27.4% -2.5% -1.1%

- - 123.4% 98.5% -3.4%

95.6% 98.5% 105.6% 103.4% 0.6%

94.0% 93.3% 93.8% 105.5% 2.8%

FY15 EPS Revision

FY16 EPS Revision

FY17 EPS Revision

DBSV vs. consensus (FY15)

DBSV vs. consensus (FY16)

DBSV vs. consensus (FY17) Source: Bloomberg Finance L.P. AllianceDBS. Note, we are above consensus for WCT’s FY15F earnings as we have included the forex gains. Gamuda’s consensus EPS trend vs. share price

3.80

4.00

4.20

4.40

4.60

4.80

5.00

5.20

5.40

0.26

0.28

0.30

0.32

0.34

0.36

0.38

0.40RMRM

FY16 EPS (LHS) FY17 EPS (LHS) Price (RHS)

Source: Bloomberg Finance L.P, AllianceDBS

IJM’s consensus EPS trend vs. share price

2.73

2.83

2.93

3.03

3.13

3.23

3.33

3.43

3.53

3.63

3.73

0.19

0.21

0.23

0.25

0.27

0.29

0.31RMRM


Source: Bloomberg Finance L.P, AllianceDBS WCT’s consensus EPS trend vs. share price

0.99

1.19

1.39

1.59

1.79

1.99

2.19

0.08

0.10

0.12

0.14

0.16

0.18

0.20RMRM


Source: Bloomberg Finance L.P, AllianceDBS Muhibbah’s consensus EPS trend vs. share price

1.40

1.60

1.80

2.00

2.20

2.40

2.60

2.80

3.00

3.20

3.40

0.20

0.22

0.24

0.26

0.28

0.30

0.32



Industry Focus

Construction

Page 10

Kimlun’s consensus EPS trend vs. share price


Industry Focus

Construction

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Sector has room to trade higher

Our construction universe is now trading at 1-year forward PE of 16x and P/BV of 1.3x against 17x and 1.3x respectively in January 2015. This is roughly at mean levels. The KL Construction Index, derived from a basket of all construction stocks listed on the stock exchange currently, is trading at 14x 1-year forward PE and 1.3x P/NTA, which are also at mean levels. The sector also commanded premium valuations during periods of more aggressive contract flows and pump-priming such as the 9MP and 10MP. During the onset of the 10MP in 2011, the sector traded to a high of >+2SD above mean or 23x PE and 3.3x P/NTA. But it subsequently derated to -1SD in late 2011 due to an overall soft equity market. Similarly from Jan-07 to Sep-08, when the 9MP projects were rolled out, the sector traded at up to 24x PE and 2.2x P/NTA. Moving to the start of the 11MP, we believe there is a probability that the sector will command higher valuations given it is at just slightly above -1SD below mean valuations. But we think this need to be also balanced by Malaysia’s less-than-favourable fiscal position given still low oil and CPO prices. In 2015, we already saw the appointment of PDP roles for key projects like MRT Line 2, LRT 3, Penang Transport Master Plan and KL 118 a slew of projects for RAPID and TRX. We think the timely rollout and award of these projects will see further valuation expansion.

DBSV KL Construction – PE trading ranges

-2SD

-1SD

Mean

+1SD

+2SD

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

2-Ja

n-09

2-Ju

l-09

2-Ja

n-10

2-Ju

l-10

2-Ja

n-11

2-Ju

l-11

2-Ja

n-12

2-Ju

l-12

2-Ja

n-13

2-Ju

l-13

2-Ja

n-14

2-Ju

l-14

2-Ja

n-15

2-Ju

l-15

PE (x)

Source: AllianceDBS, Bloomberg Finance L.P DBSV KL Construction – P/BV trading ranges

Source: AllianceDBS, Bloomberg Finance L.P KL Construction Index – PE trading ranges


Industry Focus

Construction

Page 12

KL Construction Index – P/BV trading ranges


KL Construction Index vs KLCI - PE


Industry Focus

Construction

Page 13

Stocks – PE and P/BV bands

Gamuda: Forward P/BV

Avg:14.48

+1Std:16.51

+2Std:18.55

-1Std:12.44

-2Std:10.40

9.0

11.0

13.0

15.0

17.0

19.0

Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15

PE(x)


IJM: Forward P/BV

Avg:19.42

+1Std:23.59

+2Std:27.76

-1Std:15.25

-2Std:11.08

5.0

10.0

15.0

20.0

25.0

30.0

Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15

PE(x)

Source; AllianceDBS, Bloomberg Finance L.P

Gamuda: Forward P/BV

Avg:1.67

+1Std:1.86

+2Std:2.04

-1Std:1.48

-2Std:1.29

1.0

1.2

1.4

1.6

1.8

2.0

2.2

Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15

PB(x)


IJM: Forward P/BV

Avg:1.45

+1Std:1.64

+2Std:1.84

-1Std:1.25

-2Std:1.06

0.9

1.1

1.3

1.5

1.7

1.9

2.1

Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15

PB(x)

Source: AllianceDBS,Bloomberg Finance L.P

WCT: Forward P/E

Avg:12.62

+1Std:16.55

+2Std 20.48

-1Std: 8.68

-2Std: 4.75

1.5

3.5

5.5

7.5

9.5

11.5

13.5

15.5

17.5

19.5

21.5

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

PE(x)


WCT: Forward P/BV

Avg:1.22

+1Std:1.60

+2Std:1.99

-1Std:0.83

-2Std:0.44

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2


PB(x)


Industry Focus

Construction

Page 14

MUHI: Forward P/E

Avg:7.63

+1Std:11.14

+2Std:14.65

-1Std: 4.11

-2Std:0.60 0.1

2.1

4.1

6.1

8.1

10.1

12.1

14.1

16.1


PE(x)


KICB: Forward P/E

Avg:8.76

+1Std:10.69

+2Std:12.62

-1Std:6.83

-2Std:4.90

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15

PE(x)


MUHI: Forward P/BV

Avg:1.08

+1Std:1.46

+2Std:1.83

-1Std:0.71

-2Std:0.33

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2


PB(x)


KICB: Forward P/BV

Avg:1.26

+1Std:1.57

+2Std:1.89

-1Std:0.95

-2 Std:0.63 0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15

PB(x)


Industry Focus

Construction

Page 15

Stock Profiles

ASIAN INSIGHTS VICKERS SECURITIES ed: SGC / sa: BC

BUYBUYBUYBUY Last Traded Price: Last Traded Price: Last Traded Price: Last Traded Price: RM4.63 KLCIKLCIKLCIKLCI : : : : 1,657.61

PricePricePricePrice Target :Target :Target :Target : 12-month RM 5.60 (21%)

Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: MRT Line 2, Penang Integrated Transport System

Where we differWhere we differWhere we differWhere we differ:::: Consensus is divided on the stock with equal mix of

BUY and HOLD ratings. Gamuda is our top large cap pick for its ability

to secure large muti-year high-margin projects from the government. Analyst Tjen San Chong, CFA +603 2604 3972 [email protected]

Price Relative

Forecasts and Valuation FY FY FY FY JulJulJulJul ((((RMRMRMRM m) m) m) m) 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF

Revenue 2,230 2,400 1,862 3,953 EBITDA 481 590 558 667 Pre-tax Profit 852 858 824 924 Net Profit 719 682 616 696 Net Pft (Pre Ex.) 719 682 616 696 EPS (sen) 31.0 28.4 25.6 28.9 EPS Pre Ex. (sen) 31.0 28.4 25.6 28.9 EPS Gth (%) 30 (8) (10) 13 EPS Gth Pre Ex (%) 30 (8) (10) 13 Diluted EPS (sen) 31.0 28.4 25.6 28.9 Net DPS (sen) 8.9 8.9 8.9 8.9 BV Per Share (sen) 235.6 263.4 280.4 300.6 PE (X) 15.0 16.3 18.1 16.0 PE Pre Ex. (X) 15.0 16.3 18.1 16.0 P/Cash Flow (X) nm 18.5 50.9 38.2 EV/EBITDA (X) 27.2 24.1 25.6 21.4 Net Div Yield (%) 1.9 1.9 1.9 1.9 P/Book Value (X) 2.0 1.8 1.7 1.5 Net Debt/Equity (X) 0.3 0.4 0.4 0.4 ROAE (%) 13.9 11.6 9.4 10.0 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: N/A 27.5 31.7

Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 15 S: 2 H: 6

Source of all data: Company, AllianceDBS, Bloomberg Finance L.P

BEST TRANSPORTATION PROXY

Best Best Best Best proxy to tproxy to tproxy to tproxy to trarararansportation infransportation infransportation infransportation infrastructurestructurestructurestructure Gamuda is our top large cap pick in the sector, as the best proxy to a slew of upcoming transportation related projects. its strong reputation for MRT Line 1 and PDP for Penang Transport Master Plan (PTMP) will give it leverage for other large multiplier projects such as LRT 3, Gemas-JB double tracking, Pan Borneo Highway and High Speed Rail. Its orderbook is low now at < RM1bn, but that means ample capacity to take on more multi-year projects.

Large multiLarge multiLarge multiLarge multi----year projects enyear projects enyear projects enyear projects ensure strong earnings visibilitysure strong earnings visibilitysure strong earnings visibilitysure strong earnings visibility For MRT Line 2 alone, Gamuda should be able to clinch RM6bn worth of high-margin tunneling works and another RM8bn worth of above-ground work via PDP fees. Earnings will shrink 5-10% in FY16F due to timing of recognition for MRT Line 2, but this has been priced in by the market. Construction works for MRT Line 2 is scheduled to start mid-2016, which suggests earnings recognition only in FY17F.

Swapping oneSwapping oneSwapping oneSwapping one----ofofofoff dividend for long term growthf dividend for long term growthf dividend for long term growthf dividend for long term growth There are expectations for the Splash deal to be concluded in 2016 at close to book value of RM2.8bn. We do not expect special dividends as the proceeds would likely be used for the Penang Transport Master Plan project; this would be positive as Gamuda would secure long term construction earnings and a footing in Penang’s property market.

Valuation: We have a BUY rating and TP of RM6.00 based on SOP valuation. We have factored in some expectations from MRT Line 2, largely for the PDP role. Key Risks to Our View:

Stiffer competition for MRT Line 2Stiffer competition for MRT Line 2Stiffer competition for MRT Line 2Stiffer competition for MRT Line 2. . . . The tunneling portion of MRT Line 2 will likely be open for tender under the Swiss Challenge system. Foreign contractors will still bid, but we expect Gamuda to have an edge because of its depreciated tunneling boring machines and local expertise.

At A Glance Issued Capital (m shrs) 2,406 Mkt. Cap (RMm/US$m) 11,139 / 2,522 Major Shareholders Employees Provident Fund (%) 9.6 KWAP (%) 6.8 Free Float (%) 78.8 3m Avg. Daily Val (US$m) 3.1 ICB IndustryICB IndustryICB IndustryICB Industry : Industrials / Construction & Materials

DBS Group Research . Equity

11 Jan 2016

Malaysia Company Guide

Gamuda Edition 1 Version 1 | Bloomberg: GAM MK | Reuters: GAMU.KL Refer to important disclosures at the end of this report

83

103

123

143

163

183

203

3.0

3.5

4.0

4.5

5.0

5.5

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Relative IndexRM

Gamuda (LHS) Relative KLCI INDEX (RHS)

ASIAN INSIGHTS VICKERS SECURITIES Page 17

Company Guide

Gamuda

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

On track for next earnings upcycle. We think the market has priced in the expected earnings decline in FY16F. The decline is because MRT Line 1 is largely completed and MRT Line 2 will only see contribution in FY17F.

MRT Line 2 to contribute in FY17. There is low risk of the project being delayed or shelved because it is deemed a high-multiplier and top priority ETP project. The PDP fee remains at 6% similar to MRT Line 1. The only difference is MRT Co. has introduced three additional KPIs (safety, quality and public response) which will constitute half a percentage point out of the 6%. We also expect the MMC-Gamuda JV to return as tunneling contractor (and add RM6bn of high–margin jobs to its orderbook). Tenders have already started and we expect to see the majortiy of the awards post April/May 2016 including the tunneling portion. Sale of Splash. The sale of Splash remains the biggest overhang for Gamuda. It remains optimistic of concluding the deal this year with pricing likely at book value of about RM2.8bn. Given it is actively pursuing the Penang Integrated Transport System project which requires higher upfront capex, there may not be special dividends from the sale. Front-runner for Penang Transport Master Plan (PTMP)

project. Gamuda has received a Letter of Award (LOA) - via SRS Consortium - from the Penang State Government to be PDP for the Roads and Public Transport Projects in Penang (Penang Transport Master Plan Strategy 2013-2030). The shareholding structure is as follows: Gamuda (60%), Ideal Property Development (20%), and Loh Poh Yen Holdings (20%). The key hurdle for this project is obtaining federal government approval for land reclamation and for the LRT. Gamuda is hoping to have two bites of the cherry – being PDP, and also turnkey contractor for some key components, but that is uncertain at this stage. The two main components of the project are LRT from George Town to Bayan Lepas and the Pan Island Link highway. We understand that so far discussions with the relevant parties have been encouraging. The environmental and social impact assessment studies have commenced together with alignment optional studies. Bottoming property sales. 1QFY16 property sales reached RM270m (+12% y-o-y) and should be on track to achieve its FY16F sales target of RM1.33bn (RM700m local and RM630m overseas). Unbilled sales remain solid at RM1.2bn, giving adequate earnings visibility for c.2 years. There are four projects planned to be launched in FY16F which are High Park Suites in Kelana Jaya (GDV RM600m), Bukit Bantayan in Sabah (GDV RM820m), Chapel Street Melbourne (GDV RM400m) and Toa Payoh in Singapore (GDV RM2bn).

Construction margins (%)

Property sales Malaysia (RMm)

Construction profit contribution (%)

Property profit contribution (%)

Concession profit contribution (%)

Source: Company, AllianceDBS

9.9

8.7

6.85

8.15

9.28

0.00

1.25

2.50

3.75

5.00

6.25

7.50

8.75

10.00

2013A 2014A 2015A 2016F 2017F

1,8001,700

950 900

1,300

0

400

800

1,200

1,600

2013A 2014A 2015A 2016F 2017F

22.7

32

24.7 24.1 24

0.0

6.5

13.0

19.6

26.1

32.6

2013A 2014A 2015A 2016F 2017F

37.6

26.1

29.5 28.9

33.5

0.0

4.7

9.5

14.2

19.0

23.7

28.5

33.2

38.0

2013A 2014A 2015A 2016F 2017F

39.742

45.8 47

42.5

0.0

9.5

19.0

28.5

38.0

47.5

2013A 2014A 2015A 2016F 2017F


Company Guide

Gamuda

Balance Sheet:

Manageable net gearing. Net gearing remained manageable at 0.46x as at 301 October 2015, but has inched up from 0.29x at end FY14 largely due to land banking over the past two years. More recent land bank purchases include its maiden project in Toa Payoh, Singapore for SGD345.9m (Gamuda has 50% share), a small parcel of freehold land in Melbourne for AUD40m, 18-acre land in Kota Kinabalu for RM100m, and a 257-acre parcel located just 2km from Kota Kemuning. Further land banking could raise gearing. Gamuda is still seeking land bank further in choice locations despite the softening property market. But it will be more selective now given its aggressive land banking over the past year or so. Share Price Drivers:

Proxy to transportation-related projects. Gamuda’s outstanding orderbook is at RM0.8bn currently. But it has ample capacity, a strong reputation, and technical know-how to bid for large upcoming transport-related projects such as MRT Line 2, LRT 3, PTMP, and High Speed Rail. Thus far, execution for MRT Line 1 has been smooth. Surprisingly Gamuda also expressed interest in bidding for LRT 3 civil works, Pan Borneo Highway and also the Gemas-JB double tracking. It is making a concerted effort to beef up its orderbook and to diversify its project risk. Resolution for Splash. A successful resolution for Splash would remove the overhang on the stock. Investors could welcome potential earnings prospects from the Penang Integrated Transport project at the expense of a one-off special dividend.

Company Background

Gamuda's core businesess focus on 3 segments which are engineering & construction, infrastructure concessions, and property development.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.1

0.2

0.2

0.3

0.3

0.4

0.4

0.5

0.5

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2013A 2014A 2015A 2016F 2017F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

2013A 2014A 2015A 2016F 2017F

Capital Expenditure (-)

RM

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2013A 2014A 2015A 2016F 2017F

Avg: 16.1x

+1sd: 17.9x

+2sd: 19.7x

‐1sd: 14.3x

‐2sd: 12.4x

11.1

13.1

15.1

17.1

19.1

21.1

Jan-12 Jan-13 Jan-14 Jan-15

(x)

Avg: 1.95x

+1sd: 2.11x

+2sd: 2.28x

‐1sd: 1.78x

‐2sd: 1.62x

1.3

1.5

1.7

1.9

2.1

2.3

2.5


(x)


Company Guide

Gamuda

Key Assumptions

FY Jul 2013A 2014A 2015A 2016F 2017F Construction margins 9.9 8.7 6.8 8.2 9.3 Property sales Malaysia 1,800 1,800 950.0 900.0 1,300.0

Segmental Breakdown FY Jul 2013A 2014A 2015A 2016F 2017F

Revenues (RM m) Construction 2,749 1,180 1,158 333 2,111 Property development 1,015 895 842 685 800 Infrastructure 118 154 401 409 417 Vietnam 0 0 0 435 625 Total 3,883 2,230 2,400 1,862 3,953 Pretax profit (RM m) Construction 171 294 242 233 259 Property development 283 239 289 192 237 Infrastructure 299 385 450 455 459 Vietnam 0 0 0 87 125 Net interest expense (61) (66) (124) (143) (155) Total 693 852 858 824 924 Pretax Margins (%) Construction 6.2 24.9 20.9 69.9 12.3 Property development 27.9 26.7 34.4 28.0 29.6 Total 17.8 38.2 35.7 44.2 23.4

Income Statement (RM m)

FY Jul 2013A 2014A 2015A 2016F 2017F Revenue 3,883 2,230 2,400 1,862 3,953 Cost of Goods Sold (3,342) (1,741) (1,820) (1,343) (3,235) Gross Profit 541 488 580 519 718 Other Opng (Exp)/Inc (229) (28) (10) 17 (76) Operating Profit 312 460 570 536 642 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 362 430 375 379 382 Net Interest (Exp)/Inc (18) (38) (87) (91) (100) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 656 852 858 824 924 Tax (107) (117) (133) (165) (185) Minority Interest (9) (16) (43) (43) (43) Preference Dividend 0 0 0 0 0 Net Profit 541 719 682 616 696 Net Profit before Except. 541 719 682 616 696 EBITDA 337 481 590 558 667 Growth Revenue Gth (%) 25.8 (42.6) 7.6 (22.4) 112.3 EBITDA Gth (%) (39.2) 42.7 22.7 (5.5) 19.7 Opg Profit Gth (%) (41.3) 47.4 23.9 (5.9) 19.7 Net Profit Gth (Pre-ex) (%) (1.2) 33.0 (5.2) (9.7) 13.1 Margins & Ratio Gross Margins (%) 13.9 21.9 24.2 27.8 18.2 Opg Profit Margin (%) 8.0 20.6 23.7 28.8 16.2 Net Profit Margin (%) 13.9 32.3 28.4 33.1 17.6 ROAE (%) 12.1 13.9 11.6 9.4 10.0 ROA (%) 6.4 7.7 5.8 4.4 4.7 ROCE (%) 3.7 4.8 4.6 3.6 4.0 Div Payout Ratio (%) 37.4 28.7 31.3 34.7 30.7 Net Interest Cover (x) 17.5 12.1 6.6 5.9 6.4



Company Guide

Gamuda

Quarterly / Interim Income Statement (RM m)

FY Jul 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016 Revenue 570 653 554 623 513 Cost of Goods Sold (432) (506) (429) (531) (428) Gross Profit 137 148 125 92 85 Other Oper. (Exp)/Inc 13 22 23 43 24 Operating Profit 150 170 147 135 109 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 106 88 86 99 114 Net Interest (Exp)/Inc (27) (29) (24) (44) (30) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 229 230 209 191 193 Tax (29) (36) (32) (36) (20) Minority Interest (14) (11) (17) (1) (12) Net Profit 186 182 160 154 161 Net profit bef Except. 186 182 160 154 161 EBITDA 256 258 233 234 223 Growth Revenue Gth (%) (3.8) 14.7 (15.2) 12.5 (17.7) EBITDA Gth (%) 3.8 1.0 (9.7) 0.3 (4.9) Opg Profit Gth (%) 25.6 13.4 (13.3) (8.5) (19.0) Net Profit Gth (Pre-ex) (%) (9.7) (2.0) (11.9) (4.2) 4.9 Margins Gross Margins (%) 24.1 22.6 22.5 14.7 16.6 Opg Profit Margins (%) 26.3 26.0 26.6 21.6 21.3 Net Profit Margins (%) 32.6 27.9 29.0 24.7 31.4

Balance Sheet (RM m)

FY Jul 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 300 285 312 391 465 Invts in Associates & JVs 2,277 1,234 2,621 2,999 3,382 Other LT Assets 1,461 3,125 5,163 5,163 5,163 Cash & ST Invts 1,306 920 1,438 1,801 2,240 Inventory 95 295 186 213 245 Debtors 880 1,716 1,377 1,583 1,821 Other Current Assets 2,118 2,778 2,230 2,230 2,230 Total Assets 8,436 10,353 13,326 14,380 15,545 ST Debt 460 792 777 1,177 1,577 Creditor 962 881 1,355 1,558 1,792 Other Current Liab 167 126 327 327 327 LT Debt 1,513 1,739 3,358 3,358 3,358 Other LT Liabilities 230 653 815 815 815 Shareholder’s Equity 4,878 5,474 6,337 6,745 7,233 Minority Interests 226 687 356 399 443 Total Cap. & Liab. 8,436 10,353 13,326 14,380 15,545 Non-Cash Wkg. Capital 1,964 3,783 2,110 2,141 2,177 Net Cash/(Debt) (667) (1,611) (2,698) (2,735) (2,696) Debtors Turn (avg days) 92.9 212.6 235.2 290.2 157.2 Creditors Turn (avg days) 121.8 195.5 226.8 402.3 190.5 Inventory Turn (avg days) 8.9 41.4 48.7 55.1 26.1 Asset Turnover (x) 0.5 0.2 0.2 0.1 0.3 Current Ratio (x) 2.8 3.2 2.1 1.9 1.8 Quick Ratio (x) 1.4 1.5 1.1 1.1 1.1 Net Debt/Equity (X) 0.1 0.3 0.4 0.4 0.4 Net Debt/Equity ex MI (X) 0.1 0.3 0.4 0.4 0.4 Capex to Debt (%) 1.8 0.7 0.6 2.2 2.0 Z-Score (X) 3.2 2.7 1.9 1.7 1.8



Company Guide

Gamuda

Cash Flow Statement (RM m)

FY Jul 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 656 852 858 824 924 Dep. & Amort. 25 21 20 22 26 Tax Paid (125) (73) (882) (165) (185) Assoc. & JV Inc/(loss) (362) (430) (375) (379) (382) Chg in Wkg.Cap. (335) (712) 164 (31) (36) Other Operating CF (44) (84) 818 (52) (56) Net Operating CF (185) (426) 604 219 291 Capital Exp.(net) (35) (17) (24) (100) (100) Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 78 123 84 0 0 Other Investing CF (88) 88 (1,473) 52 56 Net Investing CF (45) 195 (1,413) (48) (44) Div Paid (262) (277) (285) (208) (208) Chg in Gross Debt 114 354 1,561 400 400 Capital Issues 530 142 219 0 0 Other Financing CF (463) (374) (167) 0 0 Net Financing CF (80) (155) 1,328 192 192 Currency Adjustments 0 0 0 0 0 Chg in Cash (310) (386) 518 363 439 Opg CFPS (sen) 6.6 12.3 18.3 10.4 13.6 Free CFPS (sen) (9.6) (19.0) 24.1 4.9 8.0


Target Price & Ratings History

Source: AllianceDBS

S.No. DateClosing

PriceTarget Price

Rat ing

1: 16 Jan 15 5.02 6.00 BUY

2: 21 Jan 15 5.00 6.00 BUY

3: 27 Mar 15 5.15 6.00 BUY

4: 08 May 15 5.17 6.00 BUY

5: 24 Jun 15 4.96 6.00 BUY

6: 30 Jun 15 4.67 6.00 BUY

7: 17 Aug 15 4.15 6.00 BUY

8: 15 Dec 15 4.38 5.60 BUY

9: 17 Dec 15 4.40 5.60 BUY

Note : Share price and Target price are adjusted for corporate actions.

1

23

4

56

7

8

9

3.65

3.85

4.05

4.25

4.45

4.65

4.85

5.05

5.25

5.45

Jan-15 May-15 Sep-15 Jan-16

RM

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: BC

BUYBUYBUYBUY Last Traded Price: Last Traded Price: Last Traded Price: Last Traded Price: RM2.30 KLCIKLCIKLCIKLCI :::: 1,657.61

Price Target :Price Target :Price Target :Price Target : 12-Month RM 2.90 (26%)

Potential Catalyst:Potential Catalyst:Potential Catalyst:Potential Catalyst: RAPID, port and other infrastructure projects

Where we differWhere we differWhere we differWhere we differ:::: Our earnings are in line but TP is more aggressive as

we believe Muhibbah deserves premium valuation Analyst Tjen San Chong, CFA +603 2604 3972 [email protected]

Price Relative

Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRM m) m) m) m) 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF

Revenue 1,693 1,705 1,764 1,886 EBITDA 159 218 248 278 Pre-tax Profit 145 141 168 194 Net Profit 82 91 106 122 Net Pft (Pre Ex.) 82 91 106 122 EPS (sen) 19.3 21.6 25.0 28.8 EPS Pre Ex. (sen) 19.3 21.6 25.0 28.8 EPS Gth (%) (6) 12 16 15 EPS Gth Pre Ex (%) (6) 12 16 15 Diluted EPS (sen) 19.3 21.6 25.0 28.8 Net DPS (sen) 4.5 4.3 5.0 5.8 BV Per Share (sen) 152.4 168.4 189.1 212.9 PE (X) 11.9 10.7 9.2 8.0 PE Pre Ex. (X) 11.9 10.7 9.2 8.0 P/Cash Flow (X) nm 4.0 8.1 8.2 EV/EBITDA (X) 11.5 7.7 6.6 5.9 Net Div Yield (%) 2.0 1.9 2.2 2.5 P/Book Value (X) 1.5 1.4 1.2 1.1 Net Debt/Equity (X) 0.7 0.5 0.4 0.3 ROAE (%) 13.5 13.4 14.0 14.3 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 22.5 24.5 29.0



SCARCITY PREMIUM FOR INFRA PROXY Scarcity premiumScarcity premiumScarcity premiumScarcity premium Muhibbah is an ideal proxy to the 11th Malaysian Plan given its expertise in three core areas: i) civil engineering; ii) marine-based construction, and iii) offshore and onshore fabrication works, where its Petronas license is an advantage. Other contractors do not have this combination to compete effectively in the competitive civil engineering space. Cash cowCash cowCash cowCash cow:::: Cambodia airpoCambodia airpoCambodia airpoCambodia airport concessionrt concessionrt concessionrt concession Siam Reap and Phnom Penh airports have doubled its capacity to 12m passengers. 9M15 passenger arrivals grew 15% to 4.7m passengers. We estimate its 21% stake in the Cambodia airport concession is worth RM605m (DCF, WACC 10%, RM/USD 3.80, and passenger traffic +5% p.a. until 2040), which is already 58% of its market capitalisation. Revenues are also in USD. Infrastructure division on firmer footingInfrastructure division on firmer footingInfrastructure division on firmer footingInfrastructure division on firmer footing Our main concern with Muhibbah previously was its waning infrastructure orderbook. This has since been addressed where its infrastructure orderbook now stands at RM1.9bn (2.3x FY15F revenue). Its most recent win was a RM300m RAPID contract from Petronas while so far YTD wins have been more marine and oil and gas (RAPID) based which should be margin enhancing. Valuation: Muhibbah is a BUY with a RM2.90 TP. We value the stock based on SOP as we think it better reflects its diversified business while also capturing its cash generating Cambodian concession. Key Risks to Our View: A potential risk is non-renewal of its Roadcare concession and unfavourable outcome of the adjudication under the Building & Construction Industry Payment Act for the Wiggin Island project. At A Glance Issued Capital (m shrs) 469 Mkt. Cap (RMm/US$m) 1,078 / 244 Major Shareholders Mac Ngan Boon (%) 22.1 Lembaga Tabung Haji (%) 9.6 Ooi Sen Eng (%) 3.2 Free Float (%) 60.7 3m Avg. Daily Val (US$m) 0.3 ICB IndustryICB IndustryICB IndustryICB Industry : Industrials / Construction & Materials

DBS Group Research . Equity

11 Jan 2016


Muhibbah Engineering Edition 1 Version 1 | Bloomberg: MUHI MK | Reuters: MUHI.KL Refer to important disclosures at the end of this report

58

108

158

208

258

0.7

1.2

1.7

2.2

2.7

3.2

3.7


Relative IndexRM

Muhibbah Engineering (LHS) Relative KLCI INDEX (RHS)


Company Guide

Muhibbah Engineering


Earnings Drivers:

Stronger earnings growth ahead. We expect Muhibbah to deliver better earnings growth of 12% in FY15. 3Q15 pretax profit for its Cambodian airport concession grew to RM14.9m (+41% y-o-y, +29% q-o-q). Similarly, 9M15 pretax profit was also higher by 30% y-o-y to RM44m. This was driven by strong traffic volume growth of +15% y-o-y to 4.7m passengers while also lifted by an appreciating USD. Its crane business under Favelle Favco showed strong growth where 9M15 pretax profit increased 15% y-o-y to RM97m driven by its orderbook of c.RM0.8bn. Construction earnings also showed improvement. Its 9M15 pretax profit for construction division jumped 67% y-o-y to RM46m (vs RM28m in 9M14). However for 3Q15, construction pretax profit fell 50% q-o-q to RM12m likely due to timing of billings. We expect stronger momentum in 2016 with the recent higher margin works secured YTD. Infrastructure division most promising. Muhibbah believes the infrastructure sector is on a multi-year upcycle with potentially RM140bn worth of projects up for grabs. Also, raw material costs are more benign now. Muhibbah will be bidding for major projects such as RAPID, MRT Line 2 and WCE, and is quietly confident of clinching other marine-based projects. YTD wins amount to RM1.7bn and prospects going into 2016 look promising. Cambodia airports doubled capacity. The Siam Reap and Phnom Penh airports will double their existing capacity to 12m passengers. The US$85m capex is financed by only one year of operating cashflow, which suggests the airports are cash cows. Passenger arrivals reached 5.7m in 2014 (+12 % y-o-y) led by a recovery in Chinese tourists (20% of total; +22% y-o-y). We estimate its 21% stake is worth RM605m (DCF, WACC 10%, RM/USD 3.80, and average passenger growth of 5% p.a. until 2040). Favco capitalising on other revenue streams. Favco has been receiving increasing orders in the US for tower cranes, and is beefing up its maintenance division (c.10% of revenues). This should cushion potentially softer orders for oil and gas cranes. We still expect a record year for Favco as it runs down its high-margin peak RM1bn orderbook. It is also exploring supplying cranes to RAPID.

Construction revenue contribution (RMm)

Cranes revenue contribution (RMm)

Shipyard revenue contribution (RMm)

Margins for construction (%)

Margins for cranes (%)


967

1,082

676

1,1781,216

0

200

400

600

800

1,000

1,200

2013A 2014A 2015F 2016F 2017F

762798

840

410

538

0

200

400

600

800

2013A 2014A 2015F 2016F 2017F

207223

189176

133

0

45

91

136

182

227

2013A 2014A 2015F 2016F 2017F

2.89 2.923.09 3 3

0.00

0.39

0.78

1.17

1.56

1.95

2.34

2.73

3.12

2013A 2014A 2015F 2016F 2017F

9.510.5

14.1

10 10

0.0

2.8

5.7

8.5

11.4

14.2

2013A 2014A 2015F 2016F 2017F


Company Guide


Balance Sheet:

Needs bigger balance sheet. Muhibbah’s shareholder’s funds as at 31 December 2014 is RM861m (including minority interest). We understand the company is aiming to strengthen this further to capitalize on larger contract flows from Petronas. This may be via a private placement or rights issue. Net gearing is still manageable at 0.7x, while its cash generating Cambodia airport concession should provide adequate cash flow. Share Price Drivers:

Complete proxy to Malaysia infrastructure. Muhibbah is a complete proxy to the Malaysian infrastructure space because of its experience in bread-and-butter civil engineering works, as well as niche marine infrastructure and onshore and offshore fabrication works. Hence, we expect the company to clinch works from RAPID, MRT Line 2, LRT 3, West Coast Expressway and port projects. Capitalising on Petronas Fabrication License. Muhibbah was awarded the much sought after Petronas license to take on offshore facilities construction and major onshore fabrication works. This suggests better opportunities to bag more Petronas-related jobs (downstream works). It has a 57-acre fabrication yard with a total capacity of 25,000 MT per year, making the third largest of the Petronas license holders. Completed landmark projects. Muhibbah has an impressive track record having completed a list of landmark projects locally and abroad. Of significance is the LNG Regasification project for Petronas Gas in Melaka and South Klang Valley Expressway.

COMPANY BACKGROUND

Muhibbah is primarily involved in construction, fabrication of cranes and shipbuilding. These 3 core divisions cater largely for the O&G sector. It also holds a 21% associate stake in 2 concessions, namely the Cambodian airports and Federal road maintenance in Malaysia.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.5

0.6

0.6

0.7

0.7

0.8

0.8

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2013A 2014A 2015F 2016F 2017F


0.0

10.0

20.0

30.0

40.0

50.0

60.0

2013A 2014A 2015F 2016F 2017F


RM

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2013A 2014A 2015F 2016F 2017F

0.0

4.0

8.0

12.0

16.0

20.0

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15

(x)

-2sd: 4.3x

+2sd: 17.2x

+1sd: 13.9x

Avg: 10.7x

-1sd: 7.5x

Avg: 1.42x

+1sd: 1.87x

+2sd: 2.32x

‐1sd: 0.96x

‐2sd: 0.51x0.4

0.9

1.4

1.9

2.4


(x)


Company Guide


Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F Construction revenue 676.1 1,178.4 1,215.7 Cranes revenue 839.9 410.0 537.5 Shipyard revenue 188.6 175.7 132.5 Margins for construction 3.1 3.0 3.0

Segmental Breakdown

FY Dec 2013A 2014A 2015F 2016F 2017F Revenues (RM m) Construction 967 1,082 676 1,178 1,216 Cranes 762 798 840 410 538 Ships 207 223 189 176 133 Others 0 (410) 0 0 0 Total 1,936 1,693 1,705 1,764 1,886


FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 1,936 1,693 1,705 1,764 1,886 Cost of Goods Sold (1,723) (1,583) (1,483) (1,526) (1,622) Gross Profit 213 110 222 238 264 Other Opng (Exp)/Inc (108) 1 (119) (113) (119) Operating Profit 105 111 102 125 145 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 47 48 56 62 70 Net Interest (Exp)/Inc (19) (14) (18) (20) (21) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 133 145 141 168 194 Tax (16) (34) (21) (26) (31) Minority Interest (30) (30) (28) (36) (41) Preference Dividend 0 0 0 0 0 Net Profit 86 82 91 106 122 Net Profit before Except. 86 82 91 106 122 EBITDA 206 159 218 248 278 Growth Revenue Gth (%) (26.2) (12.6) 0.7 3.5 6.9 EBITDA Gth (%) (23.0) (22.7) 37.1 13.9 11.8 Opg Profit Gth (%) (40.1) 5.8 (8.0) 22.5 15.9 Net Profit Gth (Pre-ex) (%) (43.1) (5.6) 11.7 15.9 15.1 Margins & Ratio Gross Margins (%) 11.0 6.5 13.0 13.5 14.0 Opg Profit Margin (%) 5.4 6.6 6.0 7.1 7.7 Net Profit Margin (%) 4.5 4.8 5.3 6.0 6.4 ROAE (%) 17.0 13.5 13.4 14.0 14.3 ROA (%) 3.2 2.8 2.9 3.3 3.6 ROCE (%) 3.9 3.5 3.3 3.6 4.0 Div Payout Ratio (%) 21.9 23.4 20.0 20.0 20.0 Net Interest Cover (x) 5.5 8.1 5.6 6.4 6.9



Company Guide



FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 376 457 363 410 394 Other Oper. (Exp)/Inc (351) (424) (337) (378) (354) Operating Profit 26 33 26 32 40 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 5 17 16 11 14 Net Interest (Exp)/Inc (3) (7) (3) (6) (3) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 28 42 40 37 50 Tax 0 (10) (8) (11) (11) Minority Interest (7) (11) (9) (7) (16) Net Profit 20 20 23 19 23 Net profit bef Except. 20 20 23 19 23 EBITDA 45 69 60 56 71 Growth Revenue Gth (%) (19.3) 21.4 (20.4) 13.0 (4.1) EBITDA Gth (%) (27.5) 54.0 (13.3) (5.6) 26.0 Opg Profit Gth (%) (31.1) 27.5 (19.3) 22.5 22.8 Net Profit Gth (Pre-ex) (%) (3.1) 0.0 14.8 (17.3) 19.4 Margins Opg Profit Margins (%) 6.8 7.1 7.2 7.8 10.0 Net Profit Margins (%) 5.4 4.4 6.4 4.7 5.8


FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 711 725 708 690 670 Invts in Associates & JVs 190 236 290 349 416 Other LT Assets 30 31 31 31 31 Cash & ST Invts 426 601 812 904 991 Inventory 207 226 163 167 178 Debtors 1,077 1,334 1,121 1,160 1,240 Other Current Assets 10 13 13 13 13 Total Assets 2,650 3,165 3,137 3,314 3,537 ST Debt 738 1,168 1,198 1,228 1,258 Creditor 948 966 813 836 889 Other Current Liab 9 39 39 39 39 LT Debt 137 69 69 69 69 Other LT Liabilities 62 62 62 62 62 Shareholder’s Equity 563 644 712 799 900 Minority Interests 194 217 245 281 322 Total Cap. & Liab. 2,650 3,165 3,137 3,314 3,537 Non-Cash Wkg. Capital 337 567 444 465 503 Net Cash/(Debt) (449) (636) (455) (393) (336) Debtors Turn (avg days) 231.0 259.9 262.8 236.0 232.3 Creditors Turn (avg days) 215.7 220.7 228.0 205.4 201.9 Inventory Turn (avg days) 45.4 49.9 49.8 41.1 40.4 Asset Turnover (x) 0.7 0.6 0.5 0.5 0.6 Current Ratio (x) 1.0 1.0 1.0 1.1 1.1 Quick Ratio (x) 0.9 0.9 0.9 1.0 1.0 Net Debt/Equity (X) 0.6 0.7 0.5 0.4 0.3 Net Debt/Equity ex MI (X) 0.8 1.0 0.6 0.5 0.4 Capex to Debt (%) 2.6 4.6 3.2 3.1 3.0 Z-Score (X) 1.4 1.1 1.2 1.2 1.3



Company Guide



FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 133 145 141 168 194 Dep. & Amort. 54 0 59 61 63 Tax Paid (16) (34) (21) (26) (31) Assoc. & JV Inc/(loss) (47) (48) (56) (62) (70) Chg in Wkg.Cap. 223 (258) 123 (20) (38) Other Operating CF 21 122 0 0 0 Net Operating CF 368 (73) 245 120 118 Capital Exp.(net) (23) (57) (40) (40) (40) Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV (19) (46) 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 46 67 0 0 0 Net Investing CF 5 (36) (40) (40) (40) Div Paid (8) (19) (19) (18) (21) Chg in Gross Debt (239) 362 30 30 30 Capital Issues 19 (14) (5) 0 0 Other Financing CF (51) (46) 0 0 0 Net Financing CF (278) 283 6 12 9 Currency Adjustments (5) 0 0 0 0 Chg in Cash 90 175 211 92 87 Opg CFPS (sen) 34.3 43.9 29.0 33.2 36.9 Free CFPS (sen) 81.6 (30.6) 48.5 18.9 18.4



Source: AllianceDBS

S.No. DateClosing

PriceTarget Price

Rat ing

1: 16 Jan 15 1.87 3.50 BUY

2: 05 Feb 15 2.00 3.50 BUY

3: 02 Mar 15 2.29 3.50 BUY

4: 03 Apr 15 2.22 3.50 BUY

5: 08 May 15 2.55 3.50 BUY

6: 01 Jun 15 2.42 3.50 BUY

7: 21 Jul 15 2.28 3.40 BUY

8: 01 Sep 15 1.79 2.90 BUY

9: 04 Sep 15 1.93 2.90 BUY

10: 30 Nov 15 2.23 2.90 BUY

11: 15 Dec 15 2.22 2.90 BUY


1

2

3

4

56

7

89

10

11

1.53

1.73

1.93

2.13

2.33

2.53

2.73


RM

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: BC

BUYBUYBUYBUY

Last Traded Price: Last Traded Price: Last Traded Price: Last Traded Price: RM1.51 KLCIKLCIKLCIKLCI :::: 1,657.61

Price Price Price Price Target:Target:Target:Target: 12-Month RM 2.05 (36% upside)

Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: MRT Line 2 and stronger earnings delivery

Where we differ:Where we differ:Where we differ:Where we differ: We are more bullish than consensus in terms of our

TP. We believe Kimlun will rerate with stronger earnings deliverance and

contract wins. Analyst Tjen San Chong +603 2604 3972 [email protected]

Price Relative

Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRM m) m) m) m) 2014201420142014AAAA 2015201520152015FFFF 2016201620162016FFFF 2017201720172017FFFF

Revenue 1,220 1,207 1,303 1,359 EBITDA 102 107 113 125 Pre-tax Profit 65 76 81 92 Net Profit 45 57 62 70 Net Pft (Pre Ex.) 45 57 62 70 EPS (sen) 15.0 18.9 20.5 23.2 EPS Pre Ex. (sen) 15.0 18.9 20.5 23.2 EPS Gth (%) 26 26 9 13 EPS Gth Pre Ex (%) 26 26 9 13 Diluted EPS (sen) 12.5 15.7 17.1 19.4 Net DPS (sen) 3.0 3.8 4.5 5.1 BV Per Share (sen) 133.1 148.2 164.2 182.3 PE (X) 10.1 8.0 7.4 6.5 PE Pre Ex. (X) 10.1 8.0 7.4 6.5 P/Cash Flow (X) 5.5 30.2 8.2 6.2 EV/EBITDA (X) 5.4 5.4 4.9 4.2 Net Div Yield (%) 2.0 2.5 3.0 3.4 P/Book Value (X) 1.1 1.0 0.9 0.8 Net Debt/Equity (X) 0.2 0.3 0.2 0.1 ROAE (%) 12.9 13.4 13.1 13.4 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 16.4 16.9 17.4



MUST OWN MRT PROXY Cheapest construction stockCheapest construction stockCheapest construction stockCheapest construction stock The stock is trading at bargain valuation of 8.0x FY15F EPS and 7.4x FY16F EPS despite 2-year EPS CAGR of 11%, decent yields of c.3%, and strong order replenishment ahead. Its major shareholder - through Phin Sdn. Bhd. - has bought back over 1.23m shares (0.5% of share capital) YTD.

Potential windfall for manufacturing divisionPotential windfall for manufacturing divisionPotential windfall for manufacturing divisionPotential windfall for manufacturing division in 2016in 2016in 2016in 2016.... Kimlun’s outstanding manufacturing orderbook stands at RM230m. 2016 will likely be a busy year for this division with potential wins for Eastern Region Line (ERL) and MRT Line 2. The group’s manufacturing arm will continue to benefit from the Singapore market, where more contract wins for MRT works could be forthcoming. For MRT Line 1, Kimlun has secured c.50% market share of segmental box girder (SBG) and tunnel lining segment (TLS) worth RM272m in total (RM223m SBG and RM49m TLS). 3Q15, manufacturing margin was 31% (vs 16.9% in 3Q14), driven by larger sales orders for jacking pipes and better TLS margin.

Increasing exposure to public sectorIncreasing exposure to public sectorIncreasing exposure to public sectorIncreasing exposure to public sector Kimlun is making a concerted effort to position itself to clinch more public sector jobs from the 11MP. It is also bidding for more landed residential and non-residential (medical centres) projects. Its outstanding orderbook in total was RM1.14bn as at 30 Sep which offers adequate earning visibility up to FY16. This has the potential to grow exponentially in 2016 riding on the positive momentum in the construction industry driven by major infrastructure projects such as MRT2 and LRT3.

Valuation: Our target price is based on 11x CY16 EPS. We think this is an adequate 15% discount to the sector average. It is also below its +1SD above mean PE of 11.6x. Key Risks to Our View: LowLowLowLow----margin winsmargin winsmargin winsmargin wins. . . . In our view, the biggest risk for Kimlun is its perceived overreliance on projects in Johor. We think this is mitigated by its stringent bidding process where it only accepts projects from strong clients while also judging the ability of the project to sell.

At A Glance Issued Capital (m shrs) 301 Mkt. Cap (RMm/US$m) 454 / 103 Major Shareholders Phin Sdn Bhd (%) 29.1 Tin Pang (%) 6.3 Free Float (%) 64.6 3m Avg. Daily Val (US$m) 0.1 ICB IndustryICB IndustryICB IndustryICB Industry : Industrials / Construction & Materials

DBS Group Research. Equity

11 Jan 2016


Kimlun Corp Edition 1 Version 1 | Bloomberg: KICB MK | Reuters: KICB.KL Refer to important disclosures at the end of this report

75

95

115

135

155

175

195

215

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4


Relative IndexRM

Kimlun Corp (LHS) Relative KLCI INDEX (RHS)


Company Guide

Kimlun Corp


Earnings Drivers:

Still driven by construction. Construction remains the core revenue driver at 80-92% of revenues over FY07-FY14. At gross profit level, contribution peaked at 85% in 2011 but tanked at 49% in 2014 as GP margins fell over the years because of a larger share of Johor high-rise residential projects in the orderbook; these projects have higher M&E portion (Kimlun only earns a minimal fee (i.e. margin) for this). Adopting strategic change. The softening property market has caused some of its clients to remain cautious and defer launches. This has resulted in slower contract wins in the residential sector. In view of this, Kimlun is making a concerted effort to increase exposure in the public sector to address the slowing residential property market. The company is confident of achieving RM700m-800m of new order wins in 2015. Manufacturing margins remain higher. Kimlun operates two manufacturing plants – in Ulu Choh in Johor, and a newer plant in Senawang, Seremban. It manufactures concrete products such as SBG and other reinforced precast concrete products for the infrastructure and building sectors in Malaysia and Singapore. 3Q manufacturing segment recorded a strong margin at 31% buoyed by larger sales orders for jacking pipes and better TLS margin. Property launches on the back burner. Kimlun has launched a small property project in Pontian (GDV RM50m) comprising 131 units of property. Sales take up at its maiden property development – the Hyve in Cyberjaya (GDV RM235m) – has remained at 78% with RM41m worth of unbilled sales. The softening property market has prompted the group to defer the launch of its residential projects in Iskandar Medini (GDV447M) comprising 865 SOHO and retail units.

Construction revenue (RMm)

Concrete products revenue (RMm)

Construction margins (%)

Concrete products margins (%)

Property margins (%)


925968

1,1251,184

0

100

200

300

400

500

600

700

800

900

1,000

1,100

2014A 2015F 2016F 2017F

193

145137 135

0

39

79

118

157

2014A 2015F 2016F 2017F

5.97

6.7

7.58

0.00

1.63

3.26

4.90

6.53

8.16

2014A 2015F 2016F 2017F

16.4

22

24

26

0.0

3.3

6.6

9.8

13.1

16.4

19.7

23.0

26.3

2014A 2015F 2016F 2017F

25 25 25 25

0.0

5.1

10.1

15.2

20.2

25.3

2014A 2015F 2016F 2017F


Company Guide

Kimlun Corp

Balance Sheet:

As at 30 Sep 2015, the company is in net debt position of RM29m, translating into 6.7% net gearing. There is minimal capex requirement going forward, with the completion of the Senawang plant. We estimate capex requirement at RM25m over the next few years. The company completed a one-for-four rights issue in March 2014.

Share Price Drivers:

MRT Line 2. The upcoming tenders for MRT Line 2 are expected to happen in October/ November. If Kimlun manages to clinch a similar 50% market share of TLS and SBG for MRT Line 2; the contract value could be higher than for MRT Line 1 as the length of the rail is longer. MRT Line 1 is 51km long, of which 9.5km is underground, while MRT Line 2 is 52.2km in length, of which 10.2km will be underground. Outstanding order book in total was RM1.14bn as at 30 Sep (RM0.94bn construction, RM0.2bn manufacturing). Capitalising on other infra-related projects. Kimlun’s manufacturing division will still be able to capitalise on other infra-related projects like DASH, SUKE and DUKE. With the track record gained in the Singapore MRT projects, the group is well positioned to compete for further potential SBG and TLS sales order. Kimlun is also raising its exposure to bid for more affordable residential jobs riding on government initiatives to construct one million units of affordable houses in the next five years.

COMPANY BACKGROUND

Kimlun is primarily involved in construction and the manufacture of concrete products. Its construction division is manly involved in building jobs for property developments in Johor, while its concrete products are mainly used in the construction of MRT lines.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


1.1

1.2

1.2

1.3

1.3

1.4

1.4

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

2013A 2014A 2015F 2016F 2017F


0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

2013A 2014A 2015F 2016F 2017F


RM

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2013A 2014A 2015F 2016F 2017F

Avg: 9.3x

+1sd: 11.6x

+2sd: 13.9x

‐1sd: 7x

‐2sd: 4.8x4.2

6.2

8.2

10.2

12.2

14.2

16.2

18.2


(x)

Avg: 1.4x

+1sd: 1.77x

+2sd: 2.14x

‐1sd: 1.03x

‐2sd: 0.66x0.5

1.0

1.5

2.0

2.5


(x)


Company Guide

Kimlun Corp

Key Assumptions

FY Dec 2013A 2014A 2015F 2016F 2017F Construction revenue 968.4 1,125.1 1,184.5 Concrete products 144.5 137.2 135.0

Segmental Breakdown FY Dec 2013A 2014A 2015F 2016F 2017F

Revenues (RM m) Construction 740 925 968 1,125 1,184 Concrete products 187 193 145 137 135 Property 19 101 94 41 40 Total 947 1,220 1,207 1,303 1,359 Operating profit (RM m) Construction 46 55 65 84 95 Concrete products 32 32 32 33 35 Property 5 25 24 10 10 Total 83 112 120 127 140 Operating profit Margins Construction 6.3 6.0 6.7 7.5 8.0 Concrete products 16.9 16.4 22.0 24.0 26.0 Property 26.1 25.0 25.0 25.0 25.0 Total 8.8 9.2 10.0 9.8 10.3


FY Dec 2013A 2014A 2015F 2016F 2017F Revenue 947 1,220 1,207 1,303 1,359 Cost of Goods Sold (864) (1,104) (1,087) (1,175) (1,220) Gross Profit 83 115 120 127 140 Other Opng (Exp)/Inc (33) (38) (34) (35) (36) Operating Profit 50 78 86 92 104 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (11) (13) (10) (11) (12) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 38 65 76 81 92 Tax (3) (16) (19) (19) (22) Minority Interest 0 (4) 0 0 0 Preference Dividend 0 0 0 0 0 Net Profit 36 45 57 62 70 Net Profit before Except. 36 45 57 62 70 EBITDA 69 102 107 113 125 Growth Revenue Gth (%) 5.6 28.8 (1.0) 7.9 4.3 EBITDA Gth (%) (9.9) 49.3 4.0 6.2 10.4 Opg Profit Gth (%) (26.5) 56.7 10.7 7.1 12.3 Net Profit Gth (Pre-ex) (%) (27.8) 26.3 25.8 8.8 13.2 Margins & Ratio Gross Margins (%) 8.8 9.5 10.0 9.8 10.3 Opg Profit Margin (%) 5.2 6.4 7.1 7.1 7.6 Net Profit Margin (%) 3.8 3.7 4.7 4.7 5.1 ROAE (%) 12.4 12.9 13.4 13.1 13.4 ROA (%) 4.5 5.1 6.1 6.3 6.6 ROCE (%) 4.9 5.8 7.6 7.6 8.0 Div Payout Ratio (%) 32.3 20.0 20.1 22.0 22.0 Net Interest Cover (x) 4.3 6.2 8.2 8.3 8.9



Company Guide

Kimlun Corp


FY Dec 3Q2014 4Q2014 1Q2015 2Q2015 3Q2015 Revenue 295 280 322 258 241 Cost of Goods Sold (270) (254) (292) (231) (210) Gross Profit 25 27 30 27 31 Other Oper. (Exp)/Inc (9) (10) (8) (4) (2) Operating Profit 16 17 22 23 29 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (3) (3) (2) (2) (2) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 13 14 19 21 27 Tax (3) (3) (5) (5) (7) Minority Interest (1) (2) 0 0 0 Net Profit 9 9 14 16 20 Net profit bef Except. 9 9 14 16 20 EBITDA 23 23 28 28 40 Growth Revenue Gth (%) (4.7) (4.9) 14.9 (19.8) (6.7) EBITDA Gth (%) 14.0 (0.9) 18.9 1.9 41.5 Opg Profit Gth (%) 11.6 5.1 27.9 6.1 26.1 Net Profit Gth (Pre-ex) (%) 20.5 1.6 54.2 10.5 25.8 Margins Gross Margins (%) 8.6 9.5 9.4 10.6 12.8 Opg Profit Margins (%) 5.5 6.1 6.7 8.9 12.1 Net Profit Margins (%) 3.1 3.3 4.4 6.0 8.1


FY Dec 2013A 2014A 2015F 2016F 2017F Net Fixed Assets 157 161 166 170 173 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 5 6 6 6 6 Cash & ST Invts 32 86 75 101 144 Inventory 17 21 24 26 27 Debtors 579 596 628 678 708 Other Current Assets 60 44 44 44 44 Total Assets 850 915 943 1,026 1,102 ST Debt 145 111 113 119 125 Creditor 316 325 298 322 334 Other Current Liab 0 7 7 7 7 LT Debt 90 68 76 80 84 Other LT Liabilities 0 0 0 0 0 Shareholder’s Equity 299 400 445 494 548 Minority Interests 0 4 4 4 4 Total Cap. & Liab. 850 915 943 1,026 1,102 Non-Cash Wkg. Capital 340 330 392 419 438 Net Cash/(Debt) (203) (93) (114) (98) (65) Debtors Turn (avg days) 205.2 175.8 185.2 183.0 186.0 Creditors Turn (avg days) 129.6 108.3 106.6 98.0 99.9 Inventory Turn (avg days) 8.5 6.4 7.7 7.8 8.0 Asset Turnover (x) 1.2 1.4 1.3 1.3 1.3 Current Ratio (x) 1.5 1.7 1.8 1.9 2.0 Quick Ratio (x) 1.3 1.5 1.7 1.7 1.8 Net Debt/Equity (X) 0.7 0.2 0.3 0.2 0.1 Net Debt/Equity ex MI (X) 0.7 0.2 0.3 0.2 0.1 Capex to Debt (%) 20.2 16.1 13.2 12.6 12.0 Z-Score (X) 2.3 2.8 2.9 2.9 2.9



Company Guide

Kimlun Corp


FY Dec 2013A 2014A 2015F 2016F 2017F Pre-Tax Profit 38 65 76 81 92 Dep. & Amort. 19 25 20 21 21 Tax Paid (3) (16) (19) (19) (22) Assoc. & JV Inc/(loss) 0 0 0 0 0 Chg in Wkg.Cap. (56) (12) (62) (28) (18) Other Operating CF (16) 21 0 0 0 Net Operating CF (18) 83 15 55 73 Capital Exp.(net) (47) (29) (25) (25) (25) Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 10 11 0 0 0 Net Investing CF (37) (18) (25) (25) (25) Div Paid (12) (9) (11) (14) (15) Chg in Gross Debt 65 (56) 10 10 10 Capital Issues 0 30 0 0 0 Other Financing CF (12) 24 0 0 0 Net Financing CF 42 (11) (1) (4) (5) Currency Adjustments 0 0 0 0 0 Chg in Cash (13) 54 (11) 26 43 Opg CFPS (sen) 12.7 31.6 25.7 27.5 30.4 Free CFPS (sen) (21.7) 17.9 (3.3) 10.0 15.9



Source: AllianceDBS

S.No. DateClosing

PriceTarget Price

Rat ing

1: 27 Feb 15 1.29 1.88 BUY

2: 29 May 15 1.29 1.88 BUY

3: 12 Jun 15 1.30 2.05 BUY

4: 20 Jul 15 1.39 2.05 BUY

5: 28 Aug 15 1.16 2.05 BUY

6: 25 Sep 15 1.22 2.05 BUY

7: 27 Nov 15 1.33 2.05 BUY

8: 15 Dec 15 1.40 2.05 BUY


1

2

3

4

5

67

8

1.00

1.10

1.20

1.30

1.40

1.50

1.60


RM

Industry Focus

Construction

Page 34

AllianceDBS recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by AllianceDBS Research Sdn Bhd (“ADBSR”). This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of AllianceDBS Research Sdn Bhd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the Alliance Bank Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 11 Jan 2016, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates do not have a

proprietary position in the securities recommended in this report as of 30 Nov 2015.

2.

Compensation for investment banking services: DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US

Industry Focus

Construction

Page 35

persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or

located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR”). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

United Kingdom

This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Conduct Authority. Research distributed in the UK is intended only for institutional clients.

Dubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United States This report was prepared by AllianceDBS Research Sdn Bhd (“ADBSR”).. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

AllianceDBS Research Sdn Bhd (128540 U)

19th Floor, Menara Multi-Purpose, Capital Square, 8 Jalan Munshi Abdullah 50100

Kuala Lumpur, Malaysia. Tel.: +603 2604 3333 Fax: +603 2604 3921 email : [email protected]

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