• SMIC awards RM61.8m gas hook up contract in Shanghai
• New contracts secured from SMIC totalled RM126m to-date, an all-time high. Inclusive of this contract, year-to-date order book replenishment amounts to RM211m, making up 55% of 2019 full year replenishment
• We maintain our 12-month target price at RM1.22 based on a target PER of 21x applied on our CY21E EPS. Given the recent share price retracement and current 18% upside potential, we upgrade KGB to BUY

S(MIC)-high contract

Subsequent to the Beijing and Tianjing hook up contract awarded by SMIC in February 2020, KGB has secured another hook up job in Shanghai, worth an estimated value of RM61.8m. The contract duration will be for 2 years, targeted to be completed by August 2022.

Sole contractor for SMIC for 2020

KGB will be the sole contractor for SMIC in 2020, without any tenders required for contracts to be awarded this year. Therefore, any expansion plan brought forward to 2020 is a positive. We gather that SMIC will qualify contractors on an annual basis, and the shortlisted contractor will be the sole winner for SMIC job for the year.

Historical high contract win from SMIC

Inclusive of this contract, KGB has secured RM211m worth of jobs to date, making up 55% of 2019’s full year order book replenishment. SMIC made up 60% of yearto-date contract wins. As of April 2020, KGB’s outstanding order book stood at RM322m.

Maintain our TP of RM1.22, upgrading to Buy

We reiterate our positive view on KGB being a prime beneficiary to capitalize on SMIC’s increased capex spending in 2020. We make no changes to our existing earnings and target price of RM1.22, based on 21x CY21E PER. The recent retracement in share price now offers 18% upside to our target price, as such we upgrade the stock to a Buy (from Hold). Downside risks: further delays in project progress leading to slower revenue recognition, cost overrun and lower LCO2 demand.

Source: Affin Hwang Research - 17 Aug 2020