Summary

• Kelington Group Bhd (KGB) via its indirectly wholly-owned subsidiary, Puritec Technologies (S) Pte Ltd has clinched an Ultra High Purity (UHP) contract worth approximately RM40.0m. The contract win is the third UHP contract secured from an undisclosed global leader in engineering and project management of high technology facilities, which is engaged by a global leading semiconductor manufacturer.

• KGB will be undertaking supply and installation of process exhaust distribution ductwork under the contract. The new fabrication plant is touted to be the most advanced semiconductor manufacturing facility in Singapore, and its integrated solutions will be catered for fast-growing end-markets in the automotive, 5G mobility and secure device segments. The project will commence in mid-October 2021 and is slated to be completed by December 2022.

• Following the new win, KGB’s year-to-date orderbook replenishment stood at approximately RM841.0m. This bumps KGB’s outstanding orderbook to approximately RM979.0m, which represents an orderbook-to-cover ratio of 2.5x against FY20 revenue of RM394.6m that will provide strong earnings visibility over the next 2 years.

• We believe that KGB will be able to continue to ride on the semiconductor sector explosive boom with the group tendering for approximately RM1.00bn worth of contracts. In August 2021, global semiconductor sales recorded 29.7% YoY increment to USD47.2bn.

• With chip shipments hitting record levels, we reckon that the industry players expansion plans to ramp up the supply bodes well, moving into 2022. Demand is expected to remain robust, supported by 5G evolvement, rapid adoption of industrial automation and increasing usage in the Internet of Things (IoT) as well as cloud computing services.

Valuation & Recommendation

• Given that the orderbook replenishment exceeds our expectations, we made revised our earnings forecast higher by 1.4% and 5.9% to RM29.6m and RM43.2m for FY21f and FY22f respectively after taking into account of the aforementioned win. Consequently, we maintained our BUY recommendation on KGB, with a higher target price of RM2.01 (from RM1.90).

• Our fair value is derived by assigning targeted P/E multiple of 30.0x to its revised FY22f EPS of 6.7 sen. The assigned P/E multiple is in line with valuations of the technology sector that is trading at forward valuations of 31.3x in 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 - 6 Oct 2021