- FY13 results below expectation... Kelington’s FY13 net profit (NP) which contracted 73% to RM1.6m accounted for only 75% of our estimate of RM2.2m. The key negative deviations were: (i) slower attainment of new jobs in Malaysia and Taiwan and (ii) lower margins for the current project mix amid the competitive operating environment in Taiwan and Singapore.

- …but FY14 could be a turnaround story supported by the strong orderbook. While we are cognisant of the slower job recognition and attainment as well as the razor thin margins in FY13, we believe that the current outstanding orderbook of c.RM201m as well as the favourable tech upcycle could turn around the group’s fortune. To recap, the orderbook currently consists of the contracts (i) to provide Ultra High Purity mechanical and electrical services and medical system for Kang Hui Maternity Center Services (Shanghai) Co (remaining value of c.RM132m), (ii) total facilities management services to one of the world’s largest chip manufacturers (remaining value of c.RM20m), and (iii) UHP system design for TTE Engineering (remaining value of c.RM12m). Meanwhile, the remaining contracts value of c.RM37m is contributed by other semiconductors, O&G, plantation and healthcare players. Looking at the YTD orderbook value of c.RM201m alone (as of end-Feb 2014), this is already 3x higher than the previous orderbook value of RM63.7m outstanding during the 1QFY13 period.

- Tender book updates. Management remains optimistic in securing the Taiwan Biodiesel’s contract (worth RM35m) by 1H2014. Coupled with the other tender jobs for a Malaysian hospital (c.SGD30m), the tenderbooks value is already standing at RM113m to date.

- Higher earnings visibility with more recurring contracts secured. Note that the group’s earnings visibility is now higher with 25:75 contract mix for recurring vs. project-based contracts (from previously being a pure project-based contractor. Delving deeper, the 25% portion of recurring contracts was mainly awarded by the world’s two largest semiconductor manufacturers, which have engaged Kelington their turnkey subcontractor for facility management.

- A minimum 25% dividend payout policy (DPR) remains unchanged. While the financing for its single largest contract - the UHP mechanical and electrical services and medical system for Kang Hui Maternity Center, has stretched the group’s gross gearing from 0.37x to 1.05x (nonetheless this will be pared down in FY15 according to the management), we understand that the group will still maintain its minimum 25% DPR. If we were to err on the conservative side by assuming a 2.0 sen DPS which implies 38% of DPR based on our FY14E EPS estimate of 5.2 sen (recall that Kelington declared a 2.0 sen DPS for FY12 and FY13, which represented c.52% and >100% of DPR), this could translate into a c.4% of net dividend yield.

- Maintain TRADING BUY with a higher TP of RM0.68 (from RM0.52). Post-results, although we have trimmed our FY14 earnings estimate downward marginally by 4% for house keeping purposes, our TP has been increased from RM0.52 to RM0.68 based on a higher PER of 13.0x which is close to its 1-year forward average PER (from previously -0.5SD below its 1-year forward average PER) in light of the strong orderbook as well as the technology sector upcycle. Although the share price has appreciated by 17% since our TB rating (with previous TP of RM0.52) in December 2013, it is still trading at an undemanding valuation of 10.5x FY14 EPS, which is close to -0.5SD below its 3-year average PER. 

Source: Kenanga