- 1Q14 results within expectations. Kelington reported a 1Q14 net profit (NP) of RM2.08m which accounted for 23% and 22% of our fullyear forecast and the consensus estimates, respectively. Given the earnings visibility in FY14, we deem the results to be within expectations although the strong earnings was a tad higher than the historical 1Q NP which only made up c.7-15% of the full-year NP in the past four years (save for FY13 due to weak earnings in the 2H). On a closer look, 1Q14 NP of RM2.08m soared by c.173x QoQ and c.2.6x YoY mainly driven by the contribution from the UHP mechanical and electrical services and medical system for Kang Hui Maternity Centre Services in Shanghai (which was at 50% of total earnings).

- FY14’s earnings turnaround on track; to be supported by the strong orderbook. The decent results reaffirmed our conviction that the outstanding orderbook of c.RM175m (as of 31st March 2014) as well as the favourable tech upcycle could turn the group’s fortunes around. On a closer look, the current outstanding orderbook of c.RM175m consists of the contracts from: (i) the Ultra High Purity mechanical and electrical services and medical system for Kang Hui Maternity Center Services (Shanghai) Co (remaining value of c.RM99m), (ii) the total facilities management services to one of the world’s largest chip manufacturers (remaining value of c.RM18m), and (iii) the UHP system design for TTE Engineering (remaining value of c.RM8m). Meanwhile, the remaining contracts value of c.RM50m is contributed by other semiconductors, O&G, plantation and healthcare players. The orderbook value of c.RM175m alone is already 2.7x higher than the previous orderbook value of RM63.7m outstanding during May-2013.

- Tender book updates. While we gather that the expected rollout date for the Taiwan’s biodiesel contract (worth RM35m) has been delayed due to the longer-than-expected approval process, management remains optimistic in securing it by 2H2014. Inclusive of other tender jobs for one of Malaysia’s hospitals (c.SGD30m), the tender book value has already hit RM110m.

- A minimum 25% dividend payout policy (DPR) remains unchanged. The financing for the single largest contract - the UHP system provision for Kang Hui Maternity Center, has stretched the group’s gross gearing from 0.37x to 1.05x, but we understand that the group will still maintain its minimum 25% DPR. Even if we were to assume a conservative side 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 0.5 sen DPS for FY13 which represented c.52% and c.48%% of DPR)), this could still translate to a fair c.3% net dividend yield.

- Maintain TRADING BUY with an unchanged TP of RM0.68. We leave our earnings estimates and TP of RM0.68 (based on an unchanged PER of 13.0x (close to its 1-year forward average PER)) unchanged for now. Although the share price has appreciated by 30% since our TB rating (with previous TP of RM0.52) since December 2013, we are still feeling upbeat on the group’s outlook in light of the strong orderbook as well as the technology sector upcycle.

Source: Kenanga