Summary

• Kelington Group Bhd (KGB) via its indirect subsidiary company, Ace Gases Marketing Sdn Bhd (AGMSB) has accepted a Letter of Intent (LOI) from one of the largest optoelectronics semiconductor companies in the world for an onsite industrial gases supply scheme over a period of 10 years.

• Under the LOI, AGMSB will set up onsite generators to produce nitrogen, hydrogen, and oxygen gases at the Customer’s semiconductor manufacturing plant located at Kulim, Kedah. The supply scheme is expected to generate cumulative revenue of approximately RM180.0m over a period of 10 years via monthly fixed facility fees and sales of gases.

• The cost of acquisition of components and construction will be funded through internally generated funds and additional bank borrowing. Supply of the gases is expected to commence 1Q23. We expect high single digit EBITDA margins on the aforementioned project and this will subsequently beef up the industrial gas segment contribution from FY23f onwards.

• Moving forward, KGB’s outstanding orderbook of approximately RM1.30bn, which represents an orderbook-to-cover ratio of 2.9x against FY21 revenue of RM517.7m will provide strong earnings visibility over the next 2 years. We remain sanguine on KGB’s outlook that is well supported by the tenderbook of close to RM2.00bn as the group continues to leverage on the semiconductor players expansion plans with tenders skewing towards larger scale wafer fabrication projects.

• Meanwhile, we expect the relatively large-scale turnkey contract valued at RM420.0m secured in mid-September 2021, to generate substantial contribution from FY22f. With the LCO2 plant is operating only at around 60.0% in FY21, there is ample of room for expansion as KGB looks to tap onto the food & beverage segment after obtaining the Halal certification. For FY22f, we have imputed a utilisation rate assumption of 75.0%.

Valuation & Recommendation

• Given that the orderbook replenishment falls within our expectations, we made no changes to our earnings forecasst. We maintained our BUY recommendation on KGB with an unchanged target price of RM2.10.

• We derive our target price by assigning targeted P/E multiple of 28.0x to FY22f EPS of 7.5 sen. The assigned targeted P/E multiple is slightly above with the valuations of the technology sector that is trading at 25.3x for 2022f. The slight premium is justifiable due to KGB’s niche business model.

• Risks to our recommendation and target price include weaker-than-expected targeted orderbook replenishment of RM400.0m 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 an integral role towards the total revenue contribution and earnings growth.

Source: Mplus Research - 27 Apr 2022