Summary

• Kelington Group Bhd (KGB) via its wholly-owned subsidiary, Kelington Engineering (S) Pte Ltd (KES) has received an award of contract an undisclosed global leader in engineering and project management of high-technology facilities to undertake the specialty gas system distribution works for a world leader in innovative memory solutions’ fabrication facilities in Singapore.

• KGB will be undertaking the design, supply, delivery to site, installation, testing for the contract. The project valued at RM85.0m will commence immediately in December 2021 and expected to be completed by August 2023.

• Following the latest win, KGB’s year-to-date orderbook replenishment now stood at approximately RM976.0m; exceeding our expectations of RM900.0m for the year. We gather that year-to-date contract wins represents record high orderbook replenishment for KGB, which is a testament for the group’s capability to undertake larger number of work orders.

• Moving forward, KGB’s outstanding orderbook of approximately RM1.04bn, which represents an orderbook-to-cover ratio of 2.6x against FY20 revenue of RM394.6m will provide strong earnings visibility over the next 2 years. We reckon that the contract flows will continue, moving into FY22f, backed by the tenderbook of more than RM1.00bn worth of contracts, whilst semiconductor outlook remains relatively sound amid the shortage of chips and pent-up demand globally.

• With the relatively large-scale contract turnkey contract valued at RM420.0m secured in mid-September 2021, earnings recognition from the aforementioned project may accelerate moving into FY22f. At the same time, the industrial gas segment is expected to see improve contribution next year with the group now at the final stage to secure the Halal Certification from JAKIM.

Valuation & Recommendation

• Although the orderbook replenishment exceeds our expectations, we made no changes to our earnings forecast as contribution from the latest win may only materialise in FY22f. Hence, we retained our BUY recommendation on KGB, with an unchanged target price of RM2.01.

• Our fair value is derived by assigning targeted P/E multiple of 30.0x to its 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 31.2x 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 - 7 Dec 2021