Summary

• Kelington Group Bhd’s (KGB) 4QFY21 net profit rose 37.7% YoY to RM11.0m, on higher contribution across all major segments, coupled with the lower effective tax rate. Revenue for the quarter added 34.2% YoY to RM180.1m. A second interim dividend of 1.0 sen per share, payable on 6th April 2022 was declared.

• For FY21, cumulative net profit gained 81.8% YoY to RM31.8m. Revenue for the year grew 31.2% YoY to RM517.7m. The reported earnings came slight above expectations at 105.8% and 103.3% of ours and consensus forecasted net profit of RM30.1m and RM30.8m, respectively. The variance is mainly due to the lower reported effective tax rate at 15.4% against our assumption at 20.0%.

• We believe that the record high orderbook replenishment at RM1.20bn in 2021 might be difficult to be replicate over the foreseeable future. Hence, we have penciled an orderbook replenishment of RM400.0m for FY22f.

• As of end-2021, KGB’s outstanding order book stood at RM1.06bn which represents an orderbook-to-cover ratio of 2.0x against FY21 revenue of RM517.7m will provide earnings visibility over the next 2 years. Meanwhile, current tenderbook remains relatively healthy at around RM1.00bn that is supported by increasing job flows with semiconductor players that still on the expansion mode. With tenderbook remains relatively solid, job flows remain promising for the year.

• With the upliftment of operations restrictions on the local front, we reckon earnings growth will return to normalcy in subsequent quarters. Elsewhere, overseas operations particularly projects in China and Singapore will continue to provide earnings sustainability. Elsewhere, liquid carbon dioxide (LCO2) plant is expected to see higher utilisation, riding onto the resumption of economic activities.

• Strong global semiconductor sales that rose 26.2% YoY to record high of USD555.90bn in 2021 implies that the global chips demand remain sturdy. We believe that KGB remains in prime position to leverage on the industry’s extraordinary efforts to ramp up production to meet that demand Malaysia, China and Singapore markets

Valuation & Recommendation

• Given that the reported earnings came slightly above expectations, we tweaked our earnings forecast slightly higher by 9.0% and 10.1% to RM48.4m and RM49.5m for FY22f and FY23f respectively after adjusting for the lower effective tax rate. We maintained our BUY recommendation on KGB with a higher target price of RM2.10 (from RM2.07).

• We derive our target price by assigning targeted P/E multiple of 30.0x to FY22f EPS of 7.5 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 RM400.0m for FY22f. 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 - 28 Feb 2022