Just a week after posting QoQ growth in its latest 3QFY21 earnings, KGB announced another contract award yesterday worth RM85m for the provision of ultra-high purity solutions for a US-listed semiconductor customer’s new wafer fab in Singapore, which is known for its solid-state memory. This brings YTD job wins to a new high of RM1b while its order book hits a record RM1.04b. We remain positive on KGB’s prospects owing to its healthy job pipeline and secular growth story. Reiterate our OUTPERFORM call with a TP of RM2.50.

Finishing the year strong. Less than a week after posting QoQ growth in its latest 3QFY21 earnings despite the FMCO challenges, Kelington Group Bhd (KGB) announced another contract award yesterday worth RM85m for the provision of ultra-high purity (UHP) solutions for a US-listed semiconductor customer known for its solid-state memory products. The project entails the design, supply, delivery, installation and testing of specialty gas distribution works for the customer’s new wafer fab in Singapore which will commence immediately and is targeted to be completed by August 2023.

More to come next year. Similar with a previous customer which awarded all the packages for its new semiconductor fab in Singapore to KGB, we expect this customer to likely have more packages in the pipeline given its commitment to invest more than US$150b globally over the next decade to accelerate the manufacturing of memory chips used in mobile phones and personal computers. Judging from the previous award trend, we may be able to look forward to another one to two packages from this customer in the following months that would involve jobs such as bulk gas and abatement systems.

Order-book swells to RM1.04b. Including this recent win, KGB’s order replenishment for FY21 has hit the RM1b mark (vs. RM490m in FY20) while its outstanding order-book has swelled to another all-time high of RM1.04b with 49% coming from the UHP segment.

Elevated demand for chips to persist. Having observed the chip shortage scene for more than a year, we are convinced that the demand surge for semiconductors is not a temporary spike due to the pandemic but coming from a new wave of demand. Earnings transcripts from large wafer fab players have also reiterated that this shortage will likely continue for the next 2-3 years, which means that fab expansions will have to continue aggressively. Hence, we remain positive on KGB’s prospects owing to its niche expertise which offers exposure to the front-end semiconductor space.

Maintain FY21E and FY22E earnings at RM32.3m and RM47.0m, representing growth of 85% and 46%, respectively.

Maintain our OUTPERFORM call with an unchanged Target Price of RM2.50 on FY22E PER of 33x (+1SD to 3-year peer mean), justified by the group’s healthy job pipeline and secular growth story.

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 - 7 Dec 2021