Summary

• Kelington Group Bhd’s (KGB) 1QFY23 core net profit jumped 95.0% YoY to  RM16.2m, driven by higher contribution across all business segments. Revenue for  the quarter added 78.2% YoY to RM308.9m.

• The reported net profit slightly exceeded our expectations, making up to 27.2% and  30.8% of ours and consensus forecast of RM55.8m and RM52.5m, respectively. The better-than-expected performance was mainly due to better margins from  segmental mix, given that the reported revenue was largely in line at 24.3% of our  expectations of RM1.27bn.

• We gather that orderbook replenishment stood at c.RM596.0m to-date (inclusive of  the recent win at end-April 2023), accounts to 47.4% of our assumption of  RM1.20bn. As at end-1Q23, KGB’s outstanding orderbook of RM1.83bn that  represents and orderbook to cover ratio of 1.4x against FY22 revenue of RM1.27bn  will sustain earnings visibility over the next 2 years.

• Meanwhile, tenderbook remain relatively healthy at above RM1.00bn, supported  mainly from the on-going wafer fabrication plants expansions of the semiconductor  players. We reckon that the recent maiden win supply a fully customised chemical  delivery system bodes well to mitigate the concentrated risk from the slowdown in  the semiconductor industry.

• Still, western counterparts such as Soitec will invest SGD430.0m to double their  wafer plant capacity, while Applied Materials will commit to invest SGD450.0m to  construct a new plant in Singapore, which KGB will be able to leverage onto. Meanwhile, SMIC also brushed off the slowdown in the semiconductor industry and  remain committed on their relatively massive expansion plan in China.

• Global semiconductor sales fell -8.7% QoQ in 1Q23 to USD119.5bn due to market  cyclicality after flourishing in recent years. On a brighter note, sales in March 2023  (+0.3% MoM) advanced for the first time since May 2022; highlighting the down  cycle may have bottomed. Despite a potential recovery is in store, we remain  cautious over the rising risk of recession and global economic slowdown.

Valuation & Recommendation

• Although the reported earnings came in slightly above expectations, we made no  changes to our earnings forecast as we reckon that the rising cost of operations  may bite into margins in subsequent quarters. Consequently, we maintained BUY  recommendation on KGB with an unchanged target price of RM1.85.

• Our target price is derived by assigning a targeted P/E multiple of 20.0x to FY23f  EPS of 9.2 sen. The assigned targeted P/E multiple is slightly below the valuations  of the technology sector that is trading at 23.5x for 2023.

• Risks to our recommendation and target price include weaker-than-expected  targeted orderbook replenishment of RM1.20bn for FY23f. Any further 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 - 22 May 2023