Summary

• Kelington Group Bhd’s (KGB) wholly owned subsidiary, Kelington Technologies Sdn Bhd has secured a contract from an undisclosed US multinational company; a world leading developer, manufacturer, and provider of data storage devices and solutions company at Sama Jaya Free Industrial Zone in Kuching to undertake the construction work with respect to their Sarawak Expansion Project.

• The abovementioned contract value is worth approximately RM420.0m, subject to the actual amount of works carried out, depending on variation orders, scope options and value engineering. The works shall commence in mid-September 2021 and expected to be completed by 31st December 2022.

• We gather that this would be KGB’s single largest project win to-date. The move subsequently boosted KGB orderbook replenishment year-to-date to another record high at approximately RM764.0m (inclusive of smaller scale projects). This also exceeded our orderbook replenishment target of RM450.0m for FY21f.

• The achievement highlights KGB’s ability to move into another scale with the experience to secure large scale projects. Over the years, we note that KGB has been only making progress with single contracts valued approximately RM50- 150m.

• Moving forward, we believe that there will be more to come (although future wins may not match the abovementioned scale value), particularly within the semiconductor space. As it is, KGB’s outstanding orderbook of approximately RM902.0m; representing an orderbook-to-cover ratio of 2.3x against FY20 revenue of RM394.6m will provide strong earnings visibility over the next 2 years.

• We expect the momentum to continue with another RM50-100m worth of projects coming into the picture for KGB to wrap up the record year, premised to the strong global semiconductor sales. In July 2021, global semiconductor sales registered 29.0% YoY rise to USD45.0bn. Also, we foresee current chip shortages may extend into 2022 as supply may not be able to match the robust demand that is well supported by 5G evolvement, rapid adoption of industrial automation and increasing usage in the Internet of Things (IoT).

Valuation & Recommendation

• Given that the orderbook replenishment has surpassed our expectations, we raised our earnings forecast by 9.4% and 38.9% to RM29.2m and RM40.8m for FY21f and FY22f respectively. Consequently, we upgrade our recommendation on KGB to BUY (from Hold), with a higher target price of RM1.90.
• Our fair value is derived by assigning targeted P/E multiple of 30.0x to its revised FY22f EPS of 6.3 sen. The assigned P/E multiple is in line with valuations of the technology sector that is trading at 30.7x for 2022.
• Risks to our recommendation and target price include weaker-than-expected targeted orderbook replenishment of RM450.0m for FY22f. Any reversal 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 - 15 Sept 2021