Kian Ann Engineering’s earnings up 27.7% to $4.3m in 4QFY11

Kian Ann Engineering’s (KA) 4QFY11 and FY11 earnings were in line with our expectations. 4QFY11 earnings jumped 27.7% YoY, reaching S$4.3m, on the back of lower costs, higher revenue and other income. We now expect FY12 and FY13 earnings to hit S$19.1m (+13.8% YoY) and S$21.1m (+10.7% YoY) respectively, on the back of sustained strong demand. Trading at 4.8x FY12 earnings, we believe the stock is undervalued when compared against its construction-related and heavy equipment peers at ~7x blended FY11/FY12 earnings. Based on a target P/E of 7x FY12 earnings (its 5-year historical average), we value KA at a TP of S$0.31, implying a 47.6% upside.

4QFY11 earnings within expectations; decent dividend yield. KA’s 4QFY11 earnings leapt 27.7% YoY to S$4.3m, attributable to lower distribution costs, higher revenue and other income. 4QFY11 revenue registered a 4.7% YoY growth, on the back of higher sales from Malaysia (+16.7% YoY) and Indonesia (+33.8% YoY), hitting S$43.6m due to strong demand from the forestry, mining and infrastructure sectors. An interim and final dividend of 1.1S¢ was declared, higher than the 1S¢ paid for last year. This translates to a decent yield of 5.1%.

Gross margin still holding up. Selling prices were raised amidst greater demand for parts during the economic recovery after the 2008 global financial crisis. Thus, gross profit margin remains higher than its historical average of ~25%, coming in at 28.1% in 4QFY11 (FY11 28.4%). This marks the fifth consecutive quarter that KA has enjoyed gross margins above its historical average. We believe this is an indication of the pent-up demand for KA’s parts and understand that margins are still holding up currently.  

Focusing on emerging markets. KA would be focusing on growing its sales in emerging markets like Indonesia, India, China and Russia. We forecast FY12 and FY13 earnings to come in at S$19.1m and S$21.1m respectively, on the back of sustained margin of ~28% and a 10% YoY growth in sales.