Summary

• Kelington Group Bhd (KGB) wholly owned subsidiary, Kelington Engineering (Singapore) Pte Ltd, has received an award of contract from a Singapore customer, whom is regarded as the leader in the design, engineering, and delivery of major complex projects and facilities for high-tech industries to undertake the bulk and specialty gas system distribution works in the innovative memory solutions’ fabrication facilities in Singapore.

• The contract value is approximately RM117.0m. The contract will commence in August 2022 and is expected to be completed by June 2024. We expect the aforementioned contract to generate high single digit EBITDA margins, which is line with historical average for historical UHP segment’s works.

• Following the latest win, KGB’s year-to-date orderbook replenishment now stood at approximately RM950m. Current orderbook replenishment meets 95.0% 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 outstanding orderbook of approximately RM1.85bn, which represents an orderbook-to-cover ratio of 3.6x against FY21 revenue of RM517.7m will provide strong earnings visibility over the next 2 years. Meanwhile, KGB’s tenderbook of close to RM2.00bn remains healthy, particularly within the semiconductor space.

• Major semiconductor players are expected to ramp up their expansion plans to meet the sturdy demand, particularly within the cloud computing, data servers, sensors, and automated solutions business segments. This bodes well for KGB as a proxy to ride along the expansion of wafer fabrication plants.

• After registering a solid quarter in 1Q22, we expect upcoming quarter’s figures (2Q22 results that is scheduled to be announce tentatively on 15th August 2022) to come in stronger with the group being kept busy in execution of orderbook in hand. We reckon that the relatively large scale general contracting works (valued >RM400.0m) at East Malaysia secured in September 2021 may deliver bigger contribution.

Valuation & Recommendation

• Given that the orderbook replenishment falls within our expectations, we made no changes to our earnings forecast, pending the upcoming results release later this month. 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 - 5 Aug 2022