Summary

• Kelington Group Bhd’s (KGB) subsidiary Kelington Technologies Sdn Bhd has secured a contract valued at about RM50.0m for the engineering, procurement and construction works of oil products storage tankers for the Tank Pit 8 expansion project in Port Klang.

• The contract is for a period of 15 months commencing on 14th July 2021 and is expected to be completed by October 2022. The final contract value, however, is subject to the final variation and engineering options.

• The aforementioned contract marks the fifth major contract wins for KGB year-todate, bumping its orderbook replenishment to RM155.0m. This represents 34.4% of our orderbook replenishment target of RM450.0m for FY21f.

• While the figure makes up to less than half of our expectations, we reckon that jobs flow may shift into higher gear in subsequent quarters on the back of gradual recovery of business activities. The move will also be supported by the approximately RM1.00bn worth of tenderbook.

• For now, we think that local billings may see some minor impact from the implementation of Movement Control Order with slightly more than half of the local projects have been given the green light for operational. Still, we are unperturbed as we foresee stronger billings from the Ultra-High Purity segment for projects in China and Singapore may provide cushion for any weakness in the local operations.

• The strong global semiconductor sales that rose 26.2% YoY to USD43.6bn in May 2021 suggest that the global demand remains relatively solid. Hence, we reckon that KGB is in prime position, backed by its expertise and strong historical track record in dealing with wafer fabrication players via the newly setup plant at China.

Valuation & Recommendation

• We made no changes to our earnings forecast, given that contract secured falls within our orderbook replenishment assumption. Nevertheless, we maintained our BUY recommendation on KGB, with a higher target price of RM1.37 (from RM1.27).

• The upward revision of our fair value is premised to the higher assigned targeted P/E multiple of 30.0x (from 28.0x) to FY22f EPS of 4.6 sen. The revision is in in tandem with the higher valuations of the technology sector that is trading at 30.2x for 2022.

• Risks to our recommendation and target price include weaker-than-expected targeted orderbook replenishment of RM450.0m for both FY21f and FY22f respectively. Any decline in semiconductor sales may dampen the large scale UHP projects delivery to China and Singapore, given that the UHP segment plays a major part in total revenue contribution and earnings growth.

Source: Mplus Research - 16 Jul 2021