Summary

• Kelington Group Bhd (KGB) via its wholly-owned subsidiary, Kelington Engineering (S) Pte Ltd (KES) has received an award of contract from an undisclosed global leader in engineering and project management of high-technology facilities to undertake the gas system distribution works for the silicon wafer manufacturer’s new manufacturing facility in Singapore.

• The contract value is worth approximately RM110.0m commencing immediately from December 2021 and expected to be completed by May 2023. On top of this, KGB has also secured several smaller sized UHP contracts in Singapore with a combined value of RM66.3m in recent weeks.

• Following the latest wins, KGB’s year-to-date orderbook replenishment now stood at approximately RM1.18bn, which surpassed our expectations of RM900.0m for the year. We believe that the aforementioned UHP-related projects may generate mid-to-high teen gross margins for KGB.

• Moving forward, KGB’s outstanding orderbook of approximately RM1.23bn (56.8% or RM696.0m from UHP segment), which represents an orderbook-to-cover ratio of 3.1x against FY20 revenue of RM394.6m will provide strong earnings visibility over the next 2 years. Given the persistent semiconductor chip crunch, KGB’s outlook remains well supported by the tenderbook of more than RM1.00bn worth of contracts as the group continues to leverage on the semiconductor players expansion plans.

• At the same, we see the contribution from the relatively large-scale turnkey contract valued at RM420.0m secured in mid-September 2021, to accelerate from FY22f. Elsewhere, we gather that LCO2 plant is operating at 60.0% and KGB looks to improve the aforementioned number through customer diversification as well as tapping onto other industrial gases supply.

Valuation & Recommendation

• Given that the orderbook replenishment has exceeded our expectations, raised earnings forecast for FY22f by 2.8% to RM44.4m. Consequently, we re-iterated our BUY recommendation on KGB with a higher target price of RM2.07 (from RM2.01).
• Our fair value is derived by assigning targeted P/E multiple of 30.0x to its FY22f EPS of 6.9 sen. The assigned P/E multiple is in line with valuations of the technology sector that is trading at forward valuations of 32.0x in 2022.
• Risks to our recommendation and target price include weaker-than-expected targeted orderbook replenishment of RM450.0m for FY22f. Any slowdown 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 - 23 Dec 2021