• BUY, new MYR1.50 TP from MYR1.70, 33% upside with c.1% yield. Kelington Group’s 1Q22 earnings were in line. We expect billing momentum to pick up, with manageable impact seen from the China lockdown. FY22F is set to be another record year for the group, backed by an outstanding orderbook of >MYR1.2bn. Key risks: Weaker-than-expected earnings, delays in project execution, and lower-than-expected orderbook replenishment. Our TP builds in a parity ESG score, in line with the country median.

• Broadly in line. 1Q22 core earnings came in at MYR8.3m (+46% YoY, - 23% QoQ) against a 65% YoY jump in revenue (-4% QoQ). At 19-20% of our and consensus’ estimates, core earnings exude the typical seasonality associated with 1Q. Our forecasts are maintained.

• Strong growth across all markets. Revenue from the ultra-high purity (UHP) segment (65% of group revenue) surged 62% YoY from the increase in investment activities by semiconductor outfits. General contracting revenue jumped 136% YoY on stronger progress billings from the MYR420m project secured in Sarawak in 3Q21. Geography-wise, contribution from Malaysia rose 77% YoY, while revenue from China and Singapore jumped 42% and 61% YoY. Despite the Shanghai lockdown, management said the impact on project execution has been minimal, with workers working on site, and sufficient materials and stocks in place.

• Industrial gas business gaining traction. Revenue grew 12% YoY (-7% QoQ) in tandem with higher utilisation of the LCO2 plant, from the re- opening of economic sectors. We believe the plant is on track to achieve the 80% utilisation target by year-end. We note additional upside for the industrial gas segment from a new 10-year on-site gas supply job secured with an opto-electronics customer (valued at MYR180m) which should commence in 1Q23.

• Outstanding orderbook of MYR1.24bn should keep the group busy over the next 12-18 months. KGB has secured MYR427m new orders YTD with the most recent win being the hook up job for China’s largest foundry, valued at MYR80m. Of the outstanding orderbook, the higher margin UHP projects account for 64%, followed by general contracting (32%), and process engineering (4%).

• TP lowered. We roll over our valuation to FY23F and ascribe a lower target P/E of 28x (from 32x) to reflect the tech sector’s more cautious sentiment. We deem the valuation as fair, at +1SD of its historical P/E mean, considering the still-commendable industry prospects. Our FY22-24F core earnings are adjusted by -0.1% to 6.3%, mainly to account for some revenue recognition delays.

Source: RHB Research - 25 May 2022