We believe a positive FY21 is on the cards for KGB as the group kick starts the year with a solid order-book of RM358m. Opportunities lie ahead amid the global chip shortage with the group poised to benefit from more UHP-related jobs as front- end wafer fab players take on massive expansion this year to alleviate capacity bottlenecks. Its LCO2 plant’s utilisation has been running at 60% on strong orders from Singapore and increasing interest from Taiwan. Halal certification for its LCO2 is expected to be secured by April, facilitating its plan to penetrate the food and beverage segment. Maintain OUTPERFORM with a revised Target Price of RM2.60.

Positive for FY21. We believe a strong FY21 is on the cards for Kelington Group (KGB) as it kicks off the year with a solid outstanding order-book of RM358m, after the record quarterly revenue in 4QFY20. Note that the group was able to secure an all-time high order of RM490m in FY20 despite the pandemic and multiple lockdowns in Malaysia and Singapore. The group is optimistic on order replenishment given its commendable track record over the past years.

Bright prospects ahead. We are of the view that the global chip shortage situation will continue deep into 1H 2021 and possibly extending into 2H 2021 as well. As such, many front-end wafer fabrication firms are allocating huge capex this year to expand capacity in order to alleviate bottlenecks that were largely driven by increased demand for electronic gadgets and the structural shift towards electric vehicles (EV) among car manufacturers. This could translate into more UHP-related jobs for the group.

China in particular is committed to “vigorously support” its local semiconductor as the country pushes for self-sufficiency in chip- manufacturing according to the head of China’s Ministry of Industry and Information Technology (MIIT). Memory chip makers in Singapore are also eyeing fab expansion given that memory shortage is getting more severe, as evident by the surge in GPU prices due heightened crypto mining activities, machine learning in data centres and online gaming. As such, we believe KGB is in the limelight to benefit from such expansions as its tender-book now stands at RM900m, spread equally across Malaysia, Singapore and China. Being regarded as a preferred vendor among large MNCs, the group is in a favourable position to benefit from various on-going expansions by chip makers in these regions.

Penetrating the F&B industry. The group’s LCO2 plant utilisation rate is currently running at 60% on the back of strong orders from Singapore and increasing interest from Taiwan. The group has brought in four skid tanks and is prepared to cater for export demand. In addition, the Halal-certification for its LCO2 is expected to be completed by April. This will further increase demand for its LCO2 as the group penetrates into the food and beverage industry. Note that LCO2 business is very lucrative with GPM of >30%, more than double their ultra-high purity (UHP) gas delivery system margins.

Maintain FY21E-22E earnings as the group starts the year with a very strong order book of RM358m which is near its best performance in FY19.

Maintain OUTPERFORM with a revised Target Price of RM2.60  (previously RM3.10), based on a conservative FY21E PER of 26x (previously 32x), representing +0.5SD from 3-year mean.

Risks to our call include: (i) slower revenue recognition due to Covid-19, (ii) downturn in semiconductor sales, and (iii) delay in liquid CO2 ramp up.

Source: Kenanga Research - 5 Mar 2021