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Kelington (KGRB MK)

By Affin Hwang

BUY (maintain)

Price Target: RM2.90

Up/Downside: +23%

Previous Target (Rating): RM2.40 (BUY)


4Q20 set a record profit

  • KGB set a record new profit in 4Q20, leading to full-year 2020 profit exceeding our/consensus expectations by 13%
  • Moving into 2021, China is expected to drive growth (which comprises 37% of order book) with the execution of SMIC jobs in hand
  • Project 2021 to be a record profit year, surpassing previous high in 2019. Reiterate our Buy rating and lift our target price to RM2.90

All key regions reported higher activities, driving record profit

4Q20 revenue rose 32% qoq to RM130m, a record high as key regions (Malaysia, Singapore and China) all reported higher activities. Despite the 4ppt decline in EBITDA margin due to higher project costs incurred in Singapore, KGB broke its record by reporting a RM9.3m core profit (+29% qoq), partly due to tax incentives received from China and a previous overprovision in Singapore. The current LCO2 plant utilisation has also further improved to 60%, vs 50% in 4Q20.

2021E set to rebound after COVID19 delayed work progress in 2020

Excluding one-off forex, receivable impairments and RM3.1m subsidy received from Singapore, KGB’s 2020 core profit fell 27% yoy. The COVID19 outbreak has delayed the original work progress timeline, being China in 1Q20 and both Malaysia and Singapore in 2Q20. With the exception of Singapore, both Malaysia and China have surpassed pre-pandemic activities levels, driven by higher contract replenishment and SMIC jobs secured during the year. UHP continues to make up the bulk of the current RM358m order book at 75%, PE 13% and GC at 12%. In terms of geographical breakdown, China made up 37% of the total order book, Malaysia at 29%, and Singapore at 28%.

Maintain Buy

We lift our target price to RM2.90 (from RM2.40) after incorporating a higher target PE of 34x (from 28x) and adjust our estimates accordingly. KGB has rerated alongside the technology sector on the back of a strong semiconductor upcycle, coupled with the recent supply shortage enticing global foundries scrambling to expand capacity. On that positive note, coupled with KGB still trading at a discount compared to its peer within the sector, we reiterate our Buy rating. Downside risks could arise in the event of another lockdown which will affect existing work progress; a halt in SMIC job execution; lower LCO2 plant utilisation; and lower-than-expected contract wins.


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