Kelington’s (KGB) 3Q18 core PATAMI came in strong at RM6.4m (+36% yoy), ahead of ours and consensus estimates, making up 88% and 89% of 2018E estimates respectively. 3Q18 recorded an unexpectedly oneoff high gross profit margin of 20.7% due to lower incurred project cost for its UHP and PE projects. We maintain our BUY call with an unchanged TP of RM1.60. KGB remains our small-cap O&G top pick.

Results Ahead of Expectation

KGB recorded a 27% decline in revenue due to the absence of revenue recognition following a few completed projects located in Malaysia. Despite that, margins expanded due to lower incurred project cost which led to core PATAMI increasing 36% yoy to RM6.4m. Singapore was the biggest contributor this quarter at 40%, with Malaysia at 32%, followed by China at 20%.

Softer Revenue But Sustained by Stronger Margins

Sequentially, revenue fell by 28.7% to RM63.7m as a result of lower contribution from China, which saw % of total contribution fell from 44% in 2Q18 to 20% due to projects already completed. Despite this, gross profit margin soared 5.7ppts due to lower project cost incurred during the quarter, as we understand.

Maintain BUY With TP of RM1.60

In view of the strong 3Q18 results, we raised our FY18 forecasts to RM20.1m (from RM19.2m) to reflect the better-than-expected margins in 3Q18. We maintain our BUY call with a TP of RM1.60, based on unchanged 16x PER on FY19E EPS. We continue to like KGB as we believe that the semiconductor outlook in China remains strong amid the political turmoil. Additionally, their long-term growth remains firmly in place as KGB continues to expand their foothold within the industrial gas market. Their strong balance sheet would also allow them to leverage and ensure that their growth remains sustainable in the longer-run.

Downside Risks

Slowdown in semi-conductor sector growth and increased price competition.

Source: Affin Hwang Research - 23 Nov 2018