Thursday 28 Mar 2024
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This article first appeared in The Edge Financial Daily on August 26, 2019

Kelington Group Bhd
(Aug 23, RM1.26)
Maintain buy with an unchanged target price (TP) of RM1.63:
Kelington Group Bhd’s (KGB) first half of financial year 2019 (1HFY19) core earnings broadly met our and consensus estimates. New contracts secured (year-to-date [YTD]: RM227 million) remain strong.

 

KGB also declared a first interim dividend of one sen a share for FY19. New industrial gas business (IGB) is set to drive a new leg up in earnings from the first quarter of 2020 (1Q20), which should lift margins further in forecasted financial year 2020 (FY20F) to FY21F.

2QFY19 core profit came in at RM4.6 million (-8% quarter-on-quarter [q-o-q], -7% year-on-year [y-o-y]), after excluding the write-back impairment charges totalling RM0.524 million. This brought 1HFY19 earnings to RM9.6 million (+5% y-o-y), making up 39% and 38% of our and street estimates.

The latter is consistent with stronger 2H seasonality, with 1H earnings having made up some 42% of full-year earnings over the past three financial years.

Contribution from process engineering (PE) more than tripled to RM33.3 million y-o-y in 2QFY19 (+60% q-o-q, +250% y-o-y) upon higher project completion in Singapore. The ultra high purity (UHP) segment contributed RM55.6 million to revenue (+26% q-o-q, -26% y-o-y) — the dip was mainly due to lower progress billings recognised from the near completion of a large UHP project in China.

Nevertheless, both segments command similar margins, hence 1HFY19 profit before tax (PBT) margin remained strong at 8%, a notable improvement (FY18: 7.2%).

KGB won RM81 million worth of project orders in 2QFY19, bringing YTD new contract wins to RM227 million (1HFY18: RM236 million) — comprising mainly of UHP and PE projects. Singapore remains a strong feeder for UHP and PE-related projects (approximately 60% of outstanding orders), while the remaining projects are split evenly between Malaysia and China. Tender book currently stands at approximately RM1.2 billion.

We expect a stronger 2HFY19, premised on seasonality and stronger billings of higher-yielding UHP projects. Our discounted cash flow derived TP of MYR1.63 implies a 17 times price-earnings on FY20F earnings per share (EPS).

The stock is currently trading at 13.3 times FY20F valuation, which in our view remains undemanding, considering the fairly attractive two-year EPS compound annual growth rate of 21%, coupled with the strong balance sheet and net cash position of 23 sen per share.

Key risks include a prolonged US-China trade war, weaker order book replenishment, lower margins, and management execution. — RHB Research Institute, Aug 23

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