Kelington’s (KGB) 1Q19 core net profit was in line with consensus and our forecasts, making up 22% of both respective full-year estimates. The commendable result was mainly driven by UHP projects in Singapore, which garner higher margins. We maintain our BUY call and raise our target price to RM1.72.

1Q19 Results Came in Within Expectations

KGB’s headline net profit came in at RM4.8m (+15% yoy) in 1Q19. After excluding a RM0.6m unrealized forex loss and RM0.2m impairment on trade receivables, core net profit doubled to RM5.6m (vs. RM2.7m in 1Q18 after excluding a one-off settlement gain from Biocon). UHP business saw lower revenue of RM44m (-31% yoy) as a result of a lower contribution from a large UHP project in China, which was partly offset by a stronger Singapore operation. UHP business continues to contribute the bulk of group revenue. Process Engineering (PE) revenue rose 43% yoy to RM20.8m, attributed to the larger projects completed in Malaysia. Collectively, these two divisions accounted for 85% of KGB’s total revenue while General Contracting (GC) and Industrial Gases contributed 13% and 2% respectively.

Singapore Made Up 41% of 1Q19 Revenue (vs. 16% in 1Q18)

Revenue fell 12% yoy to RM76.4m due to a lower contribution from China (-53% yoy). However, revenue was supported by a rise in UHP projects in Singapore (+128% yoy), which was the largest contributor at 41% of group revenue in 1Q19. As a result of the higher revenue from Singaporean projects, gross and net profit margins both rose to 18.3% (from 14.1%) and 6.3% (from 4.9%) respectively.

Order Book Update

The total outstanding order book stood at RM330m with RM146m of new orders secured YTD. UHP made up the bulk of the order book at 79% of the total, followed by PE and GC at 16% and 4% respectively. Singapore, Malaysia and China are the 3 biggest contributors to the current order book at 59%, 17% and 15% of the total respectively.

Maintain BUY With a Raised TP of RM1.72

We maintain our BUY call and raise our target price to RM1.72 (from RM1.60) after rolling forward our valuation horizon to 2020E, based on an unchanged 16x PER. Despite the recent slowdown in China, Singapore continues to make up for the shortfall, while the industrial gas business continues to be the company’s long-term attraction, once the LCO2 plant comes on stream by end-3Q19.

Downside Risks

The key downside risks to our call include a slowdown in the semiconductor sector, increased price competition, and a breakdown in trade negotiations between the US and China.

Source: Affin Hwang Research - 24 May 2019