KGB has clinched another job win, this time from GlobalFoundries which recently allocated US$4b to expand its wafer fab in Singapore. The award is worth RM45m for a base build specialty gas delivery system and work will commence immediately as the customer is seeing an urgent need to increase its 12-inch wafer output up to 1.5m per year (+43%) due to swelling chip demand. This brings YTD order wins to RM264m while order-book stands at RM523m. We believe this is the start of more fab expansions to come, indicating a slew of jobs in the pipeline for KGB. Maintain OUTPERFORM with a higher Target Price of RM1.50.

Just the start. Kelington Group (KGB) made an announcement yesterday indicating another UHP (ultra-high purity gas delivery system) job win, this time from GlobalFoundries’ wafer fabrication plant in Singapore. This award is worth RM45m for a base build job relating to the specialty gas delivery system and work will commence immediately as the customer is seeing an urgent need to ramp up capacity due to swelling chip demand. We are very positive on this development as it strengthens our belief in KGB’s competency and competitive edge among peers given that the group managed to win this contract in a short span of time, merely one month after GlobalFoundries announced its US$4b capex plan to build a new wafer fab. Including the recent award, KGB has secured RM264m job wins in 2021 while its order-book has ballooned to RM523m.

More to come. We observed that larger wafer fab players such as TSMC and SMIC have started their capex plan early in the year, while medium sized players are only starting to execute their capex plans now and can no longer hold back as the gap between surging demand and available capacity continues to widen. This indicates that we can expect more wafer fab expansion to come and KGB is in a favourable position to benefit from more UHP jobs, in line with management’s goal to achieve another year of record job wins. The group’s tender-book has jumped to RM1.5b, a sharp increase of 50% from the RM1b usually reported by them. This is likely driven by strong demand for semiconductors as our channel check shows that laptop manufacturers are still experiencing chip supply that are 25-30% below demand while automotive semiconductor companies are locking in wafer orders with non-cancellation clauses for up to 24 months.

Braving through the MCO challenges. Despite running at 60% workforce restriction in its Malaysia operation during the MCO 3.0 period, we are hopeful for the 2QFY21 result to remain stable QoQ as UHP jobs in China have been running smoothly and would likely be able to offset the MCO 3.0 impact. Note that China contributes c.48% of the group’s order-book.

Maintain FY21E-22E earnings of RM31.1m and RM35.6m, representing growth of 78% and 14%, respectively.

Maintain OUTPERFORM with a higher Target Price of RM1.50  (previously RM1.30), based on rolled forward FY22E PER of 26x, representing 15% discount to peers’ average.

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 - 19 Aug 2021