Summary

• Kelington Group Bhd’s (KGB) 1QFY22 net profit expanded 49.7% YoY to RM8.3m, on higher contribution across all major segments following the execution of its orderbook on hand. Revenue for the quarter gained 65.4% YoY to RM173.3m.

• The reported earnings make up to 17.1% and 19.5% of ours and consensus forecasted net profit of RM48.4m and RM42.6m, respectively. We deem the figures to be in line as historically 1Q results makes up to less than 25.0% of full year figures, while 4Q results are seasonally stronger over the years.

• We believe that the record high orderbook replenishment at RM1.20bn in 2021 might be difficult to be replicate over for FY22f. Still, the contract wins during 1Q22 at RM347.0m remains pretty impressive, largely on track to meet our internal orderbook replenishment target of RM700.0m.

• As of 1QFY22, KGB’s outstanding order book stood at approximately RM1.24bn which represents an orderbook-to-cover ratio of 2.4x against FY21 revenue of RM514.6m will provide earnings visibility over the next 2 years. Meanwhile, current tenderbook remains relatively healthy at around RM1.00bn that is supported by increasing numerous projects from semiconductor players in bid to address the chip shortages across the globe.

• Moving forward, we expect KGB to deliver improved performances particularly in 2H22, back by the relaxation of Covid-19 control measures in China, while the group remain focus onto the execution of works secured in FY21. Locally, KGB will also be kept busy with the large-scale construction work that was secured at Sarawak towards end-2021. In the meantime, the utilisation rate of liquid carbon dioxide (LCO2) plant is at 70.0%.

• We gather that the global semiconductor sales remain healthy, recording at 23.0% YoY growth to USD151.70bn in 1Q22. We foresee the demand-supply imbalances trend to prolong amid rising demand and technological advancement such as 5G, electric vehicles and IoT, while the supply constraints from the shortages of raw materials and global supply chain disruptions remains in the picture.

Valuation & Recommendation

• Given that the reported earnings deem to be within expectations, we made no changes to our earnings forecast. We maintained our BUY recommendation on KGB, but with a lower target price of RM1.61 (from RM2.10).

• We derive our target price by assigning a revised targeted P/E multiple of 21.0x (from 30.0x) to FY23f EPS of 7.7 sen. The lowered assigned targeted P/E multiple is in tandem with the revision of valuations of the technology sector that is trading at 20.8x for 2023f.

• Risks to our recommendation and target price include weaker-than-expected targeted orderbook replenishment of RM700.0m 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 - 25 May 2022