Summary

• Kelington Group Bhd (KGB) wholly owned subsidiary, Kelington Engineering (Shanghai) Co Ltd has received an award of contract on 11th May 2022 from China’s largest semiconductor foundry (which is also their existing client) to perform gas hook up works in Beijing, China.

• The contract value is worth approximately RMB123.0m (approximately RM80.0m), commencing in May 2022 and is expected to be completed by March 2024. We expect the aforementioned contract to generate high single digit EBITDA margins, which is line with historical average for similar works.

• Following the latest win, KGB’s year-to-date orderbook replenishment now stood at approximately RM427.0m. Current orderbook replenishment represents 61.0% of our orderbook replenishment target of RM700.0m for FY22f.

• 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. At the same time, KGB’s tenderbook of close to RM2.00bn remains healthy, particularly within the semiconductor industry as chip shortages remain prevalent with expansion of wafer fabrication plants in the pipeline.

• Globally, semiconductor sales continue to demonstrate improvement after having registered 23.0% YoY rise to USD151.70bn in 1Q22. This suggests demand remains relatively robust, which we expect KGB to be in a prime position to leverage on that, premised to their strong historical track record, specialising in Ultra High Purity (UHP) delivery system works.

• Moving forward, we reckon that the UHP segment will continue to anchor revenue contribution, being kept busy by multiple wafer fabrication works. Meanwhile, the general contracting segment will focus onto the relatively large-scale construction work that was secured last year at Sarawak, while the industrial gas segment will be kept busy with the gas supply scheme for one of the largest optoelectronics semiconductor companies located at Kulim, Kedah.

• Although China has step up their lockdown measures since March 2022, the latest win suggests that there is no slowing down for KGB’s China operations. Still, we remain cautious that the impact on KGB operations in China would be manageable as certain work progress may be delayed to subsequent quarters ahead.

Valuation & Recommendation

• Given that the orderbook replenishment falls within our expectations, we made no changes to our earnings forecast, pending their 1Q22 quarterly results release in coming weeks. Therefore, 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 RM700.0m 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 - 13 May 2022