Kelington’s (KGB) 2Q19 earnings missed estimates as a result of higher-than-expected effective tax rate and admin expenses. We cut our FY19 earnings by RM2m in light of these, also factoring in our new FY20-21 forecasts. Nevertheless, we maintain positive on its long-term business outlook; the commencement of LCO2 plant by end-2019 will be an earnings growth driver in FY20-21. Maintain our BUY rating with a lower TP at RM1.68 (from RM1.72).

2Q19 Results Was Below Our Expectations

2Q19 net profit came in at RM5.1m (+5% qoq, +16% yoy), below ours and consensus’ expectations. The miss was mainly due to a higher-thanexpected tax rate and bonus provisions made in 2Q19. Excluding a RM0.7m write back of trade receivable, 2Q19 core net profit was lower yoy at RM4.3m (-23% qoq, -19% yoy). The Ultra-High Purity (UHP) segment saw lower revenue at RM55.6m (-26% yoy) as KGB has yet to recognize most of their major contracts, including their recent secured RM96m contract from Singapore. Process Engineering (PE) saw higher revenue of RM33.3m (>100% yoy) as the group wraps up several works in both Malaysia and Singapore. These two segments contributed to 93% of KGB’s 2Q19 revenue (Fig 2).

Singapore Remains the Key Market

2Q19 revenue was higher by 7% yoy at RM95m as KGB completed more jobs in their 3 main operating regions. Singapore continues to contribute the bulk of the revenue at RM38m (+45% yoy), followed by China at RM29m (- 26% yoy) and Malaysia RM24m (+22% yoy).

Order Book Update

The total outstanding order book stood at RM312m (ytd new wins amounted to ~RM220m), compared to RM330m in end 1Q19. UHP segment made up the bulk of the order book at 76%, followed by PE and GC at 19% and 4% respectively. Singapore, Malaysia and China remains the 3 biggest contributors to the group’s order book at 59%, 18% and 18% respectively.

Maintain BUY With a Lower TP of RM1.68

We maintain our BUY call but lower our target price to RM1.68 (from RM1.72), based on unchanged 16x FY20 EPS. We cut our 2019-21E EPS by 3-9% after incorporating higher admin costs and effective tax rate. Notwithstanding our earnings cut, we remain optimistic on KGB’s long-term growth premised on its industrial gas business expansion plan and the commission of the LCO2 plant by end-2019.

Source: Affin Hwang Research - 23 Aug 2019