Kelington Group Bhd (KGB)’s 3QFY21 CNP of RM8.0m (+8% QoQ; -2% YoY) brings 9MFY21 CNP to RM20.9m (+74% YoY), which came in within expectations, representing 65% and 73% of our and consensus full-year estimates, respectively. 9MFY21 jumped 74% on a 30% jump in revenue to RM337.6m on higher job completion across all four business segments. The industrial gas (30% GPM) recorded a strong 57% YoY revenue growth on a cumulative basis to RM23.9m. We expect a better 4Q on the commencement of the recently won RM420m job. Maintain OUTPERFORM and TP of RM2.50.

Within expectation. KGB’s 3QFY21 CNP of RM8.0m (+8% QoQ; -2% YoY) brings 9MFY21 CNP to RM20.9m (+74% YoY), which came in within expectations, representing 65% and 73% of our and consensus full-year estimates, respectively.

Results’ highlight. QoQ, despite the challenges faced during the FMCO period that led to a 16% dip in 3QFY21 revenue to RM106.4m, KGB still managed to further extend its growth streak as 3QFY21 CNP grew 8% to RM8.0m. This was on the back of improved operational efficiencies as GPM grew 3.8ppt to 19.2% while NPM inched 1.7ppt upwards to 7.5%. YoY, 3QFY21 revenue climbed 8% while CNP rose 9% thanks to higher contributions from Malaysia (+15%) and Singapore (52%). Cumulatively, 9MFY21 revenue increased 30% to RM337.6m while CNP jumped 74% to RM20.9m on higher job completion across all four business segments. More interestingly, revenue from the industrial gas has grown 57% YoY on a cumulative basis to RM23.9m which is very encouraging as this segment yields c.30% GPM (double the margin of other segments).

Full swing ahead. With restrictions lifted and higher vaccination rates, we feel sanguine for a strong quarter sequentially as the group is able to operate at full scale in the countries it has presence in. The group has commenced operations for the newly awarded RM420m turnkey project by a US-listed semiconductor company involved in memory chips which will see contribution as early as 4QFY21. While KGB has more than exceeded our estimated contract win for the year, the group is still expecting further wins in the coming months. YTD, the group has won RM891m worth of contracts, boosting its orderbook to a record high of RM1.2b. We continue to like KGB owing to its unique exposure in the semiconductor wafer fab which is expected to continue expanding aggressively over the next few years.

Maintain FY21E and FY22E earnings of RM32.3m and RM47.0m, representing growth of 85% and 46%, respectively.

Maintain OUTPERFORM and Target Price of RM2.50 based on FY22E PER of 33x (+1SD to 3-year peer mean), justified by the group’s healthy job pipeline and secular growth story.

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 - 1 Dec 2021