Kelington (KGB) ended 4Q19 on a strong note with earnings coming in RM3m above expectations, on the back of better-than-expected margins. 2019 saw heavier weightage of work from Singapore with China seeing a slight slowdown. This led to an EBITDA margin expansion of 0.6ppts. Despite the earnings surprise, we are taking a prudent approach to lower our 2020-21E EPS by 11% to factor in a more cautious macro backdrop. We lower our 12-month TP to RM1.43, but reiterate our BUY rating.

2019 Profit Increased 10% Yoy

4Q19 headline profit of RM7.8m was stronger by 50% yoy. Excluding the one-offs which are mostly impairments in nature on receivables, core profit was higher at RM9.2m, bringing 2019 core profit to RM23.4m. This was above our and consensus estimates of c.RM20m. Singapore made up the bulk of 2019 revenue at 47% (vs 32% in 2018), while China saw a slowdown with its revenue contribution dropping from 31% to 26%.

Stronger Sequential Earnings on Quicker UHP Project Recognition

Sequentially, 4Q19 revenue increased 15% yoy to RM111m on the back of faster project recognition from the UHP business. On top of that, these jobs are Singapore-based which garnered higher margins vs. the rest, contributing to an EBITDA margin expansion of 5.3ppts.

Outstanding Order Book at RM371m

KGB is off to a good start, securing RM105m of contract wins in the year to date. Inclusive of the wins, the current outstanding order book stands at RM371m. We are cutting our 2020-21E EPS by 11% to factor in a more cautious macro outlook moving forward. We also introduce our 2022 forecasts

Maintain BUY With Lower TP of RM1.43

While we turn cautious on the global macro environment, we believe KGB’s long-term industrial story remains solid. To date, KGB has locked in 40% of its total LCO2 capacity and is in the midst of qualifying its product with some MNCs. As the current market is still largely dominated by one player, we believe that any slowdown is unlikely to affect the utilisation of the plant. We maintain our BUY call but lower our target price to RM1.43 (from RM1.60), based on 17x FY20E PER. Downside risks include a worse-thanexpected global slowdown which will affect KGB’s bread-and-butter business, and any future breakdown in talks between the US and China.

Source: Affin Hwang Research - 27 Feb 2020