Kelington Group - Results below expectations

Period   2Q12/1H12

Actual vs. Expectations

1H12 earnings of RM2.5m is considered below expectations even though 2H are likely stronger; accounting for 24% each of street’s and our full year estimates of RM10.5m and RM10.3m respectively. 

Dividend   No dividend announced.

Key Result Highlights

YoY, 2Q12 group’s revenue decreased 34.5% to RM24.1m due to lower revenue contributions from Malaysia, China, Singapore and Vietnam. But operations in Taiwan increased by 35.7% to RM6.8m due to better sales arising from the key base build project for a touch screen panel application. 1H12 earnings were further dragged down by 40.4% due to operating margins compression of 2.1ppt to 5.8% on increased personnel expense and additional cost arising from the newly acquired subsidiary, Puritec Technologies (S) PL. 

QoQ, 2Q12 group’s revenue declined 9.9% to RM24.1m while the PBT increased 83.5% to RM1.8m due to margin expansion of 3.9ppt to 7.6% on higher-margin projects (e.g. touch screen panel application) in the quarter. 

Outlook   The coming quarters may be challenging due to global economic uncertainties, which has adversely affected the earnings visibility of the tech sector. 

As of to-date, the group has secured several new orders amounting to RM43.3m in 3Q12, which has boosted its total order book to RM126m, which was lower than its order book in May 2011 (RM122m). Hence, we believe that the group would have lower earnings for FY12.

Change to Forecasts

Revised down our FY12-13E NPs by 28.2%-21.7% to RM7.4m-RM9.4m. We lowered overall sales volume from wafer fabrication, solar and touch screen panel. 

Rating  Downgrade to UNDERPERFORM

Since earnings visibility is being affected by uncertainties, we downgrade Kelington’s rating to a UNDERPERFORM rating as its total return potential is now below 3% after our TP downgrade below.

Valuation   Lower TP of RM0.47 (RM0.50 previously) based on unchanged 8x Fwd PER on lowered FY13E EPS of 5.9sen (refer overleaf).  

Risks  Fluctuation in foreign currencies.

Cyclical sector.

Source: Kenanga