- Potentially earnings underperformance in FY14 due to longer-than-expected contracts completion date. The expected completion date of the group’s single largest contract - Kang Hui Maternity Center Services (with outstanding orderbook value of RM99m) is likely to be delayed to end-FY15 from 4Q14 as targeted previously due to the upgrades and changes in design and layout of the building requested by the client.

- Recall that the construction of Kang Hui Maternity Center had been put on hold during 2Q14 and 3Q14 while waiting for the medical license approval from the related authorities. While all these could lead to lower earnings recognition this year, we are not overly concerned as we understand this is only a matter of timing of the earnings recognition. Moreover, the shortfall would be partly cushioned by the additional contract secured from one of the world’s largest chip manufacturers (from orderbook value of RM23m to RM50m due to new job secured in 2Q14).

- Outstanding orderbook remains strong at c.RM191m currently, which consists of other contracts such as the UHP system design for TTE Engineering contracts of c.RM8m and remaining contracts value of c.RM48m from other semiconductors, O&G, and plantation players. Note that c.50% of the current outstanding contracts is expected to last until FY15. Meanwhile, on the tenderbook front, management remains optimistic in securing the Taiwan’s biodiesel contract (worth RM100m currently, from RM35m previously) by 4Q14, although the tender process has yet to be finalised. All in all, we understand that Kelington has tendered for at least a total worth of RM185m in projects.

- EPS for FY14E adjusted to 3.3 sen post bonus shares issuance, where the group’s share base has ballooned to 215.8m (from 160.7m) post the 1-for-3 bonus issue (which went ex on 11th June). Meanwhile, the group has also rewarded its shareholders with 1-for-3 free warrants in June (to be staggered over 5-year) to address its low liquidity issue. We have also introduced FY15E NP of RM9.1m and FY15E EPS of 4.0sen (+19% YoY driven by the projects mentioned above).

- Maintain TRADING BUY; with a revised TP of RM0.52 (exbonus) after rolling-over our valuation base year to FY15E with a targeted PER of 13.0x (close to its 1-year forward average PER). Our FY14E NP, however, was reduced to RM7.6m (-17%) to account for the slower-than-expected earnings recognition from Kang Hui Maternity Center Services. We view that the recent share price weakness is unjustified, due to its current strong orderbook and earnings visibility of up to 1 year. All in, we see a total return upside of 25% from here on top of a 3.7% of expected net yield in FY15, based on a conservative 40% dividend payout.

Source: Kenanga