1QFY21 CNP came in within expectations at RM5.5m (+37% YoY; -44% QoQ), representing 18%/20% of our/street forecast. Revenue increased 24% YoY as operations in Malaysia doubled while China side grew 47%. Despite being a seasonally weaker quarter, EBIT margin improved 1.3ppt QoQ on better efficiencies, which will be further amplified in subsequent quarters with higher margin jobs like UHP and process engineering being delivered. The industrial gas segment showed promising signs with revenue of RM8.8m (+73% YoY; +28% QoQ), which we believe could potentially morph into a solid earnings driver. Maintain OUTPERFORM and Target Price of RM2.60.

Within expectation. Kelington Group Bhd (KGB)’s 1QFY21 CNP came in at RM5.5m (+37% YoY; -44% QoQ), representing 18% and 20% of our and consensus full-year estimates. We deem this to be in line with our expectations as we had priced in seasonality factors, especially for the first quarter with shorter working days. Nevertheless, it was a commendable achievement by KGB, having recorded its all-time high first quarter earnings.

Results’ highlight. YoY, 1QFY21 CNP of RM5.5m (+37% YoY) was led by a 24% increase in revenue to RM104.8m as operations in Malaysia and Taiwan saw revenue doubled while China operations grew 47%.

QoQ, 1QFY21 CNP declined 44% on a 19% dip in revenue as the first quarter is usually the weaker period. While GPM was 1.6ppt lower QoQ due to higher deliveries of general contracting work (+220% QoQ), it is worth noting that EBIT margin actually rose 1.3ppt on the back of better operational efficiencies. We believe the impact of such efficiencies will be further amplified in the following quarters when the higher margin jobs like ultra-high purity gas system (UHP) and process engineering are delivered.

Glimpse of huge potential was seen in the industrial gas segment as it chalked an impressive revenue growth of 73% YoY and 28% QoQ to RM8.8m with 60% utilisation rate. This was mainly attributable to the surge in demand for liquid CO2 from neighbouring countries which is used for various applications from food preservation and carbonated drinks to industrial use such as welding and even oil recovery by reducing its viscosity to improve flow rate. Having 24/7 uninterrupted supply of waste CO2 gas from Petronas, the group aims to be a dependable supplier of liquid CO2 (LCO2) in the region. In addition, KGB also distributes a variety gasses to the semiconductor players and is experiencing heightened demand due to the chip production scramble amidst the current shortage. With GPM of 30% (2x higher than other segments), we are optimistic for the industrial gas division to morph into a huge earnings driver.

Maintain FY21E/FY22E CNP of RM31.1m/RM35.5m, representing 43% and 14% growth, respectively.

Maintain OUTPERFORM and Target Price of RM2.60 based on FY21E PER of 26x (+0.5SD to 3-year mean).

Risks to our call include: (i) slower revenue recognition due to Covid-19, (ii) downturn in semiconductor sales, and (iii) delay in LCO2 ramp-up.

Source: Kenanga Research - 27 May 2021