• NEUTRAL, new MYR1.59 TP from MYR1.53, 5% upside with c.2% FY23F yield. Kelington Group’s FY22 results were a beat, thanks to higher- than-expected revenue recognition, with quarterly revenue and earnings at record highs. We see FY23F earnings growth being supported by the solid MYR1.71bn outstanding orderbook. At +0.5SD from its historical P/E mean, the stock’s valuation is fair, and reflects sentiment on the tech sector.

• Ending the year on a high. 4Q22 core earnings of MYR18m (+15% QoQ, +123% YoY) brought FY22 earnings to MYR55.6m (+91% YoY). This was 7% ahead of our and consensus’ estimates. FY22 revenue jumped 147% YoY from higher contributions across all segments, particularly general contracting (GC; +350% YoY). Consequently, the EBIT margin was whittled down to 6.2% in FY22 (FY21: 7.4%) with the higher mix of GC revenue. We see margins normalising in the subsequent quarters, with a chunky GC project at its tail end and larger contributions from the higher-margin industrial gas business. A DPS of 1.5 sen was declared, bringing the full- year DPS to 2.5 sen (FY21: 1.5sen), implying a 29% payout.

• Improvements all around. Revenue from the ultra-high purity segment surged (+41% QoQ, YTD: +135%) on new contract wins from foundry capacity expansion, particularly in Singapore. The GC segment posted the highest topline growth (-28% QoQ, YTD: +350%), with the recognition of the MYR420m turnkey contract secured in 3Q21. Earnings prospects remained strong, backed by its MYR1.71bn outstanding orderbook and the record MYR1.85bn new orders secured in FY22 (FY21: MYR1.2bn). The group will focus on executing these projects, as well as seek new opportunities, with management previously guiding for fresh tenders to be called in 1H23 from principals such as Soitec, Micron, SMIC and Siltronics.

• Industrial gas business building steam. The segment continues to grow (-1% QoQ, YTD: +81) from stronger customer demand due to the economic reopening and exposure to new markets, including the Oceania countries. The second liquid carbon dioxide (LCO2) plant (70,000 tonnes), which is adjacent to its Phase 1 facility (50,000 tonnes), is expected to come on- stream by end-2023 and drive stronger recurring earnings going forward, providing some buffer to its project-based revenues.

• Forecasts. Our FY23-24F core earnings are adjusted by -1 to 6% post results. We introduce our FY25F earnings of MYR71m. Our TP rises to MYR1.59 after rolling forward to our base valuation year FY24F, and is still pegged to 21x. At +0.5SD from its historical P/E mean, we believe the strong earnings growth into FY24F has been priced in. Key upside/downside risks: Stronger-/weaker-than-expected earnings/margin and orderbook replenishment, and a re-/de-rating in the tech sector.

Source: RHB Research - 28 Feb 2023