Kelington’s (KGB) 1Q20 core results missed expectation. 2Q20 will likely see a more severe impact from the lockdown, affecting both Malaysia and Singapore operations. Risk lies to the downside in the event that the locked downs are prolonged. With this, we cut our earnings. Downgrade the stock to Sell rating with a slightly higher target price of RM0.76.

2Q to See a More Severe Impact

1Q20 revenue declined 24% qoq to RM85m with operations in China heavily hit following the cities closure which started end February. Malaysia’s revenue contribution declined by a marginal RM2.8m (-13% qoq) affected by MCO which started mid-March. EBITDA margin fell 6ppts predominantly due to less Singapore related work executed which commands a higher margin.

2Q20: Malaysia and China Gradual Recovering, LCO2 Badly Impacted

The LCO2 plant utilization has fallen from 50% pre lock down to 10% currently. The weaker demand was largely affected by a standstill in construction activities, and the export restriction to Singapore due to logistic constraints. The rest of the Malaysia operations have resumed operation since mid-May and currently running at 70-80% efficiency. China has resumed full operations.

Earnings Cut Factoring the Restricted Movement

We slashed our earlier EPS forecasts by 31-36% to factor in the delay in work progress and lowering the LCO2 plant utilization in 2020 to 30% (from an average of 50% previously). Overall, 2Q20 would likely be adversely impacted affected by the ongoing restricted movement in both Singapore and Malaysia. We nevertheless believe that 2Q would unlikely plunge into a loss, as the reopening of China in 2Q would help cushion the negative impact. Malaysia and Singapore now make up close to 60% of the total order book, and China around 37%.

Uncertain Outlook – Downgrade to Sell

We lift our target price to RM0.76 (from RM0.74) after rolling forward our valuation horizon and with a higher target PER of 13x, based on +1SD its historical 5-year mean (from 10x previously). Downgrade to Sell (from Hold) in view of the uncertain outlook. Key upside risks: faster lifting of restricted movement orders, higher contract replenishment, recovery in LCO2 plant utilization rate.

Source: Affin Hwang Research - 1 Jun 2020