Summary

• Kelington Group Bhd (KGB) wholly owned subsidiary, Kelington Technologies Sdn Bhd (KTSB), has entered into a construction contract with a Franco-Italian multinational electronics and semiconductors manufacturer to undertake the design, engineering and construction works on a new manufacturing building. Work scopes consist of a manufacturing (plating) area, mechanical and electrical utilities plant, and a multi-storey carpark to the existing plant in Johor.

• The contract value at approximately RM114.0m is subject to the actual amount of work carried out, depending on variation orders, scope options, and value engineering. The contract will commence in June 2022 and is expected to be completed by December 2023. 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 RM700.0m. Current orderbook replenishment meets 70.0% of our projected orderbook replenishment target of RM1.00bn for FY22f. We believe that the aforementioned figure is achievable, premised to the positive outlook within the semiconductor industry.

• Moving forward, KGB’s current outstanding orderbook of approximately RM1.60bn, which represents an orderbook-to-cover ratio of 3.1x 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 RM1.50bn remains healthy, particularly within the semiconductor industry as chip shortages remain prevalent with expansion of wafer fabrication plants in the pipeline.

• We gather that the global semiconductor sales stayed upbeat after recording 21.1% YoY rise to USD50.90bn in April 2022. As such, major semi-conductor players will continue ramp up their expansion plans to meet the sturdy demand, particularly within the cloud computing, data servers, sensors, and automated solutions business segments.

• Moving forward, we anticipate the UHP segment (value of contracts accounts to more than half of total orderbook on hand) will continue to anchor revenue contribution. Meanwhile, the general contracting segment will focus onto the relatively large-scale construction work that was secured last year at Sarawak. LCO2 plant which recorded 70.0% utilisation rate is expected to ramp up in 2023 from the industrial gases supply scheme over a 10-year period secured recently.

• Although KGB have some exposure to UHP-related works in China, we gather that there is minimal disruption as workers are already placed on site. Meanwhile, we note that there is also sufficient building materials and stocks for the execution of the scope of works to be carried out.

Valuation & Recommendation

• Given that the orderbook replenishment falls within our expectations, we made no changes to our earnings forecast. Therefore, we maintained our BUY recommendation on KGB with an unchanged target price of RM1.61.
• We derive our target price by assigning a targeted P/E multiple of 21.0x to FY23f EPS of 7.7 sen. The lowered assigned targeted P/E multiple is in tandem with the valuations of the technology sector that is trading at 20.8x for 2023f.
• Risks to our recommendation and target price include weaker-than-expected targeted orderbook replenishment of RM1.00bn for FY22f. Any decline 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 - 17 Jun 2022