Summary

• Kelington Group Bhd’s (KGB) wholly owned subsidiary, Kelington Engineering Pte Ltd has secured a contract valued at RM49.0m from an un-disclosed global leader in engineering and project management of high-technology facilities to undertake the bulk gas system distribution works for a global leading semiconductor manufacturer’s new fab in Singapore. The contract spans from September 2021 and is expected to be completed by May 2023.

• The recent win brings KGB orderbook replenishment year-to-date to approximately RM313.0m (inclusive of smaller scale projects). This represents 69.6%, which is largely on track to meet our orderbook replenishment target of RM450.0m for FY21f.

• We believe that job wins will continue to flow over the foreseeable future with economic activities gather pace, coupled with the strong demand in the semiconductor sector. The move will also be supported by the approximately RM1.50bn worth of tenderbook. Moving forward, KGB’s outstanding orderbook of approximately RM451.0m will provide earnings visibility over the next 2 years.

• Locally, we gather that operations are on track to recover to normalcy in recent weeks alongside with the higher vaccination rate in Malaysia. Elsewhere, the LCO2 plant is in the final stage of obtaining the Halal certification from JAKIM. Upon approval, we believe that the plant current utilisation rate of 50.0% may be able to absorb new clienteles from the food processing business.

• On the global scale, the global semiconductor sales remain upbeat, recorded 29.0% YoY rise to USD45.0bn in July 2021. This suggests demand remains relatively strong amid the robust demand.

• In bid to address the chip shortages, Semiconductor Manufacturing International Corp (SMIC) has recently unveiled their plans to build China's first GigaFab with planned capacity of around 100,000 wafer starts per month (WSPM), costing nearly USD8.87bn. We understand that SMIC is one of KGB’s prominent clients, which we reckon that KGB is in the pole position to leverage on the expansion plans.

Valuation & Recommendation

• Given that the orderbook replenishment falls within our assumption, we made no changes to our earnings forecast. Therefore, we maintained our HOLD recommendation on KGB, with an unchanged target price of RM1.37.
• Our fair value is derived by assigning targeted P/E multiple of 30.0x to FY22f EPS of 4.6 sen. The assigned P/E multiple is in line with valuations of the technology sector that is trading at 32.4x for 2022.

Source: Mplus Research - 8 Sept 2021