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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 26 Feb 2021, 5:04 PM

 

Kelington Group - Chip Shortage to Boost UHP Prospects

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Upgrade TP to RM3.10 (55% upside). After a very positive meeting with the management, we believe that FY21 could see yet another year of record high orders, building upon the RM490m all-time high order secured in FY20. SMIC has continued to award more jobs with the latest one secured in Dec 2020. Existing SMIC jobs at hand will keep the group busy till June, excluding on-going 2021 tenders. Being the incumbent, we believe KGB has the advantage in winning the 2021 bids which will consist of UHP hook-up in all four SMIC fabs. Its LCO2 plant’s utilisation recently picked up from 50% to 100% due to strong demand from Singapore, leading to higher ASP. Halal certification for its LCO2 is expected to be secured in a month’s time, facilitating its plan to penetrate the food and beverage segment. Hence, we believe there is room for more ASP hikes.

Anticipating a record year for FY21. We came away from a conference call with the management feeling pumped-up over the group’s prospects. With increased expansions among wafer fab players taking place this year due to a surge in demand for semiconductor components, we believe that FY21 could yet be another record year, building upon the existing all-time high order of RM490m secured in FY20.

SMIC continues to award more jobs to KGB with the latest one secured in December 2020 worth RM40m. Existing SMIC jobs at hand is enough to keep the group busy till June 2021, excluding on-going 2021 tenders. Being the incumbent, we believe KGB has the advantage in winning the 2021 tenders which will consist of UHP hook-up in all four SMIC fabs. The group has also secured sub-contract jobs from TSMC via a partner as well as Micron which is looking to expand due to the global memory shortage. KGB’s tender-book now stands at RM900m, spread equally across Malaysia, Singapore and China. Being regarded as a preferred vendor among large MNCs, the group is in a favourable position to benefit from various on-going expansions by the likes of WD Penang (announced RM2.3b investment), Micron SG (new fab construction), and Lam Research.

LCO2 plant hits 100%. The group’s LCO2 plant utilisation rate recently picked up from 50% to 100% due to strong orders from Singapore which led to a slight increase in ASP. Also, the group expects its LCO2 to be Halalcertified in a month’s time. This will further increase demand for its LCO2 as the group penetrates into the food and beverage industry. Hence, we believe there is room for more ASP hikes. Note that LCO2 business is very lucrative with GPM of >30%, more than double their ultra-high purity (UHP) gas delivery system margins.

Maintain FY20E-21E earnings. Operations at all its 17 sites in Malaysia is on-going as usual despite the movement control order (MCO) 2.0 as the group has been granted approval by MITI under essential services.

Maintain OUTPERFORM with a higher TP of RM3.10 (previously RM2.30), based on higher FY21E PER of 32x (previously RM23.6x), representing +1SD from 3-year mean. We believe KGB deserves to be traded at a higher multiple due to its exclusive exposure to the front-end semiconductor boom, which is very rare given that Malaysia is a back-end centric market.

Risks to our call include: (i) slower revenue recognition due to Covid-19, (ii) downturn in semiconductor sales, and (iii) delay in liquid CO2 ramp up.

Source: Kenanga Research - 20 Jan 2021

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