By Kenanga

KGB posted back-to-back record high quarterly earnings with 4QFY20 CNP of RM9.8m (+16% YoY), bringing FY20 CNP to RM21.8m (-17% YoY) which came in above expectations at 162%/143% of our/street forecast. Its revenue in Malaysia and Taiwan doubled while China operation’s revenue grew 85%. KGB clinched a record-high RM490m new orders in FY20 despite the pandemic and is on track for another year of tremendous earnings growth, backed by higher demand for UHP jobs due to massive front-end expansion amid the global chip shortage.

Reiterate OUTPERFORM and Target Price of RM3.10.

Above expectation. Kelington Group Bhd (KGB) registered yet another record high earnings with 4QFY20 CNP of RM9.8m (+16% YoY), after adjusting for impairment of RM2.3m. Cumulatively, FY20 CNP of RM21.8m (-17% YoY) came above expectations at 153% and 135% of our and consensus respective full-year forecasts. 

Results’ highlight. YoY, the back-to-back record high earnings in 4QFY20 CNP of RM9.8m (+21% QoQ; +16% YoY) was led by an all-time high revenue of RM129.5m (+32% QoQ; +16% YoY) as operations in Malaysia and Taiwan saw doubling of job orders while China operations’ revenue grew 85%. As a result, FY20 revenue reached a new high of RM390m (+2.6% YoY) with CNP at RM21.8m (-17% YoY). QoQ, 4QFY20 CNP jumped 21% to RM9.8m (post-adjustment for impairment) while revenue leaped 32% as the general contracting and process engineering segments grew 93% and 97%, respectively.  

Job awards reach new high. Despite a pandemic year, KGB managed to clinch RM490m new jobs in FY20, its highest ever in a year, chalking a solid 27% increase from RM386m in FY19. Such unparalleled track record coupled with its superior skill set will equip KGB with great advantage moving into FY21 which we strongly believe will be another year of tremendous earnings growth. This is possible thanks to the group’s unique exposure to the front-end wafer fabrication players which are scrambling to expand capacity amid the current global chip shortage. SMIC is requesting KGB to speed things up at its Shanghai plant and hinted of more UHP-related job awards. 

Tendering activities are fully lined up with WD Penang (announced RM2.3b investment), Micron SG (resuming memory spending), along with Lam Research, Bosch, and B Braun looking to expand capacity in Penang. Note that KGB has worked with WD and Micron SG in all their past expansions, positioning the group well for upcoming tenders. All in, the group has a tender-book of approximately RM900m spread equally across Malaysia, China, and Singapore.  

Maintain FY21E CNP of RM31.1m and introduce FY22 CNP of RM35.5m, representing 43% and 14% growth, respectively. 

Maintain OUTPERFORM and Target Price of RM3.10 based on unchanged FY21E PER of 32x (+1SD 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 liquid CO2 ramp-up.