Kelington Group Bhd (KGB)’s 4QFY21 CNP of RM11.0m (+38% QoQ; +38% YoY) brings FY21 CNP to RM31.8m (+82% YoY), within expectations, representing 100%/103% of our/consensus estimate. The commencement of the RM420m turnkey job in Sarawak as well as a slew of UHP jobs in Singapore will continue to drive growth in FY22. With the chip crunch persisting and driving new expansions, KGB remains the prime beneficiary given its unique exposure to the front-end supply chain Maintain OUTPERFORM and an adjusted lower TP of RM1.90.

Within expectation. 4QFY21 CNP of RM11.0m (+38% QoQ; +38% YoY) brings FY21 CNP to RM31.8m (+82% YoY), which came in within expectations, representing 100% and 103% of our and consensus estimates, respectively.

Results’ highlight. QoQ, KGB bounced back from the lockdownplagued 3QFY21 to record a 38% increase in 4QFY21 CNP of RM11.0m on a 70% jump in revenue to RM180.1m. In addition to the year-end being the group’s seasonally stronger quarter, the 70% surge in revenue was also attributable to the RM420m project in Sarawak that kicked started in the reported quarter. YoY, 4QFY21 revenue climbed 34% while CNP rose 38% thanks to higher contributions from Malaysia (+54%) and Singapore (73%). Note that the group has recently secured UHP jobs from three different Singaporean firms, mainly related to wafer manufacturing, wafer processing and memory chips. Cumulatively, FY21 revenue increased 31% to RM517.7m while CNP leaped 82% to RM31.8m on higher job completion with improved efficiency as GPM increased 1.6ppt to 16.5%.

Chip shortage remains prevalent. Despite efforts around the globe to expand capacity, the chip crunch situation persists until today and is expected to continue throughout 2022 and possibly into 2023. This is evident by the continuous announcement of new plant construction by tech players (both local and MNCs). Therefore, we believe KGB remains in the sweet spot as a prime beneficiary owing to its unique expertise in the UHP system which is crucial to semiconductor plants. YTD, the group has won RM1.2m worth of contracts, while its outstanding order-book stands at RM1.1b as of 31 December 2021. 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.

Tweaked FY22E CNP by -5% to RM44.7m as we factor in potential delay in project timeline due to the rising Covid-19 cases. We also introduced FY23E earnings of RM39.3m.

Maintain OUTPERFORM but lower Target Price to RM1.90 (previously RM2.50) based on 27x (previously 33x) FY22E PER (+1SD to 5-year peers’ mean) to account for unfavourable sentiment in the tech space because of macro factors such as the rising interest rate environment and geopolitical tensions in Europe.

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 - 28 Feb 2022