• Stay BUY and MYR1.69 TP, 33% upside with c.1% yield. 1H22 earnings met expectations, with quarterly revenue and net profit at all-time highs. Kelington Group’s prospects remain sound with earnings backed by a burgeoning outstanding orderbook of MYR1.4bn. Our TP reflects a FY23F EPS of 28x, at +1SD of the historical P/E mean, with a parity ESG score imputed – in line with the country median.

• Another solid quarter. 2Q22 core earnings came in at MYR13.6m (+63% QoQ, +84% YoY) following an 80% QoQ surge in revenue (+147% YoY) – both quarterly records were supported by higher billings from on-going and new contracts secured. At MYR21.9m, 1H22 core earnings (+67% YoY) formed 46% of our estimate (consensus: 48%). Gross margin eased for the third quarter in a row to 10.4% in 2Q22 with the continued ramp-up in general contracting (GC) revenue. An in line first interim DPS of 1 sen was declared. Our forecasts are maintained.

• Good billings momentum. Ultra-high purity or UHP revenue jumped 70% QoQ, mainly from higher project billings in Singapore (+68% QoQ) and Malaysia (+90% QoQ). The chunky Sarawak turnkey job for a leading global data storage and devices player fuelled GC revenue growth of 152% QoQ (+672% YoY) with completion slated for 1Q23. The industrial gas segment continued to chart steady growth (+18% QoQ, +53% YoY), driven by higher production output. We see the positive growth sustained, supported by rising demand for liquid carbon dioxide or LCO2 as the economic recovery gathers pace.

• MYR1.4bn orderbook a new high. KGB has amassed solid new orders of MYR798m YTD-June. This makes up 67% of FY21 order wins or an annualised growth of 34%. The most recent win relates to a MYR117m bulk and specialty gas system distribution contract for a leading Europe-based foundry in Singapore.

• FY22F core earnings to jump 61% YoY. We remain positive on KGB’s prospects, as its stranglehold in the Singapore and China markets for specialised engineering works allows it to capitalise on the rapid fab capacity expansion. The expansion in front-end semiconductor capacity is crucial to avert supply chain vulnerabilities and forms part of policy initiatives – in China – to shore up domestic production capabilities. This should mitigate concerns over a potential softening in chip sales moving forward.

• Key risks include weaker-than-expected earnings, delays in project execution, faster-than-expected normalisation of the demand-supply imbalance in the tech sector, and lower-than-expected orderbook replenishment.

Source: RHB Research - 16 Aug 2022