KUALA LUMPUR (May 6): Affin Hwang Investment Bank on Friday (May 6) downgraded Kelington Group Bhd (KGB) to "hold" from "buy" and lowered its target price to RM1.39 (from RM2.10) on a less aggressive earnings growth trajectory and amid a higher interest rate environment.

Affin Hwang's Tan Jianyuan said in a note that the Shanghai lockdown since late March 2022 is expected to dampen KGB’s earnings trajectory.

Based on KGB’s estimated 30% combined exposure to China, he believes approximately 10% of its current order book comprises work based in Shanghai, which had been affected by the ongoing city-wide lockdown.

“Work sites have been put on halt since March, with no clear indication of a full reopening by the government. Work progress will likely continue to be affected in May with the week-long Labour Day holidays,” he said.

However, he gathered that the China supply chain and its trading segment, where KGB sources its gases, had not faced any disruption from the recent lockdown.

According to Tan, KGB’s landmark turnkey construction contract in Sarawak, which makes up about 33% of its order book, has also experienced some delays.

“The preliminary site preparation work has witnessed some setbacks, leading to a slow progress billing. The initial contract completion timeline was slated towards end-2022,” he said.

However, he believes contract recognition might potentially spill into the first quarter of 2023.

He lowered his 2022 earnings projection for KGB by 13% but raised his 2023 forecast by 16% after factoring in some project delays and work to be spilled over into next year relating to the Shanghai and Sarawak turnkey contracts.

At 10.35am on Friday, KGB was five sen or 3.88% lower at RM1.24, valuing the group at RM825.91 million. Year to date, the counter has fallen 28.32%.