Summary

• Kelington Group Bhd’s (KGB) 2QFY21 net profit surged 11.8x YoY to RM7.4m, recovering from the low base effect from last year that was impacted by the implementation of MCO 1.0, coupled with improved contribution across all business segments. Revenue for the quarter added 63.4% YoY to RM126.4m. A first interim dividend of 0.5 sen per share, payable on 1st October 2021 was declared.

• For 6MFY21, cumulative net profit jumped 175.7% YoY to RM12.9m. Revenue for the period gained 42.0% YoY to RM230.2m. The reported earnings accounted to 48.3% of our forecasted net profit of RM26.7m and 47.9% of consensus forecasted net profit at RM26.9m. We deem the figures to be in line with expectations of sequential earnings improvement in 2H21 amid resumption of economic activities.

• We gather that the current orderbook replenishment of RM264.0m accounts to 58.9% of our orderbook replenishment target of RM450.0m for FY21f. Moving forward, KGB’s outstanding order book to RM402.0m (71.9% from UHP segment) which represents an orderbook-to-cover ratio of 1.0x against FY20 revenue of RM394.6m will provide earnings visibility over the next 18 months.

• Meanwhile, current tenderbook stands at RM1.50bn will be supported by increasing job flows particularly in the second half of the year as global economic activities gradually resume. The rising tenderbook (previous quarter at RM1.00bn) implies that orders are gathering pace amid the rapid expansion of semiconductor players.

• While 2QFY21 recovery was hampered by some restrictions from the implementation of Full Movement Control Order (FMCO), local operations will gradually return to normalcy with the acceleration of vaccination programme. Elsewhere, overseas operations particularly projects in China and Singapore will continue to provide earnings sustainability.

• Strong global semiconductor sales that rose 29.2% YoY to USD44.5n in June 2021 implies that the global demand remain upbeat. We believe that KGB is in prime position to leverage on buoyant sector, which saw the group has already secured several UHP projects in recent years from the Chinese and Singapore market.

Valuation & Recommendation

• Given that the reported earnings came within expectations, we made no changes to our earnings forecast. With the appreciation in share price in recent months, we downgrade our recommendation on KGB to HOLD (from Buy), with an unchanged target price of RM1.37 as we deem that valuations are near to fair, in our view.

• We derive our target price by assigning targeted P/E multiple of 30.0x to FY22f EPS of 4.6 sen. The assigned targeted P/E multiple is in tandem with the valuations of the technology sector that is trading at 30.2x for 2022f.

• Risks to our recommendation and target price include weaker-than-expected targeted orderbook replenishment of RM450.0m for both FY21f and FY22f respectively. Any decline in semiconductor sales may dampen the large scale UHP projects delivery to China and Singapore, given that the UHP segment plays a major part in total revenue contribution and earnings growth.

Source: Mplus Research - 25 Aug 2021