Summary

• Kelington Group Bhd’s (KGB) 3QFY21 net profit climbed 62.3% YoY to RM8.0m, driven by the higher contribution from the process engineering segment that defy the impact from the multiple lockdowns during the period, coupled with the lower effective tax rate. Revenue for the quarter grew 8.3% YoY to RM106.4m.

• For 9MFY21, cumulative net profit jumped 117.6% YoY to RM20.9m. Revenue for the period added 29.3% YoY to RM336.6m. The reported earnings accounted to 70.4% and 70.8% of ours and consensus forecasted net profit of RM29.6m and RM29.5m, respectively. We deemed the figures to be in line with expectations of stronger performance in the final quarter, supported by the resumption of economic activities.

• We gather that the record high orderbook replenishment year-to-date at RM891.0m already makes up to 99.0% of our orderbook replenishment target of RM900.0m for FY21f. Moving forward, KGB’s outstanding order book stood at RM932.0m which represents an orderbook-to-cover ratio of 2.4x against FY20 revenue of RM394.6m will provide earnings visibility over the next 2 years.

• Meanwhile, current tenderbook stands at RM1.00bn will be supported by increasing job flows with semiconductor players still on the expansion mode. With tenderbook remains relatively solid, job flows remain promising. Moving into FY22f, we have imputed an orderbook replenishment of RM400.0m.

• With the upliftment of operations restrictions on the local front, we reckon earnings growth will return to normalcy in subsequent quarters. Elsewhere, overseas operations particularly projects in China and Singapore will continue to provide earnings sustainability. Elsewhere, liquid carbon dioxide (LCO2) plant is expected to see higher utilisation, riding onto the resumption of economic activities.

• Strong global semiconductor sales that rose 27.6% YoY to USD48.3bn in September 2021 implies that the global chips demand remain sturdy. We believe that KGB is in prime position to leverage on the industry’s extraordinary efforts to ramp up production to meet that demand Malaysia, China and Singapore markets.

Valuation & Recommendation

• Given that the reported earnings came within expectations, we made no changes to our earnings forecast. Therefore, we maintained our BUY recommendation on KGB with an unchanged target price of RM2.01.

• We derive our target price by assigning targeted P/E multiple of 30.0x to FY22f EPS of 6.7 sen. The assigned targeted P/E multiple is in tandem with the valuations of the technology sector that is trading at 30.2x for 2022f.

• Risks to our recommendation and target price include weaker-than-expected targeted orderbook replenishment of RM400.0m for FY22f. Any decline in semiconductor sales may dampen the large scale UHP projects delivery to China and Singapore, given that the UHP segment plays a major part in total revenue contribution and earnings growth.

Source: Mplus Research - 1 Dec 2021