RHB Investment Research Reports

Kelington Group - Another Strong Start

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Publish date: Mon, 22 May 2023, 10:19 AM
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An official blog in I3investor to publish research reports provided by RHB Research team.

All materials published here are prepared by RHB Investment Bank Bhd. For latest offers on RHB Invest trading products and news, please refer to: http://www.rhbinvest.com

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  • Stay NEUTRAL, new MYR1.41 TP from MYR1.59, 6% upside with c.2% FY23F yield. Kelington’s 1Q23 revenue and earnings are ahead of expectations, mainly due to higher-than-expected revenue recognition. We lower our target P/E from 21x to 18x – at +0.5SD from its historical mean – to factor in the more cautious sentiment in the tech sector and the normalisation in industry prospects. Key upside/downside risks: Stronger/weaker-than-expected orderbook replenishment and a re- rating/de-rating of the tech sector.
  • Earnings beat. KGB’s 1Q23 core earnings of MYR16.3m (+95.4% YoY, -9.9% QoQ) are ahead of expectations, at 26% and 28% of our and Street full-year estimates. While revenue dipped sequentially on seasonal factors, the higher revenue contribution from the process engineering (PE) and industrial gases (IG) segments boosted the group’s GPM to 12.3% (4Q22: 10.4%). As financing costs rose to MYR3.3m (4Q22: MYR1.7m), core earnings contracted 10% QoQ.
  • Positive growth across all segments. The 1Q23 revenue from the ultra- high purity (UHP) segment surged 63% YoY from higher revenue recognition across all markets, and remains the largest contributor to group revenue (accounting for 60%). The PE unit’s turnover of MYR35.7m (12% of total revenue) jumped 199% YoY, primarily from the tank pit expansion project secured in 4Q22, while the revenue from IG business shot up by 145% YoY. The utilisation rate of KGB’s liquid carbon dioxide plant is at 91%, boosted by its penetration into Oceania countries.
  • Outlook. With MYR568m in new contracts secured as at end-April, and supported by a MYR2.27bn outstanding orderbook, KGB should be able to weather through the broader slowdown in semiconductor sales. According to Gartner, global semiconductor revenue is projected to decline by 11.2% YoY in 2023 before rebounding by 18.5% YoY in 2024.
  • Forecasts. We raise FY23-25F earnings by 4-5% after increasing our orderbook replenishment assumptions. We also ascribe a lower target P/E of 18x (from 21x) to reflect a more conservative view on the tech sector’s outlook, the macroeconomic headwinds in China, and sluggish consumer demand. Our valuation is fair, at +0.5SD from the historical P/E mean – considering its still-solid orderbook. Our TP incorporates a 0% ESG premium/discount as KGB’s ESG score is on par with the country median.
  • ESG framework update. As there is now a greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 22 May 2023

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