We are positive on its recently announced Letter of Intent (LOI) from one of the largest optoelectronic semiconductor companies in the world, which is building a new state-of-the-art 8-inch wafer fab, for a 10-year onsite industrial gas supply (oxygen, nitrogen, hydrogen). The job will commence in 1Q 2023 with a cumulative revenue of RM180m. With the industrial gas segment enjoying a lucrative GPM of 30% (twice the UHP segment), this job will further enhance the group’s recurring income stream and earnings visibility. Reiterate our OUTPERFORM call with a Target Price of RM1.90.

10-year onsite gas supply. Kelington Group Berhad (KGB) has recently received a LOI from one of the largest optoelectronic semiconductor (relating to LEDs, sensors, and lasers) companies in the world for the supply of industrial gasses over a period of 10 years with a cumulative revenue of c.RM180m. The LOI came about as the customer intends to build a new wafer fabrication facility in Kulim with a budgeted capex of €800m (approximately RM3.7b) over the next 18-24 months, more than double the capex spent in the previous major expansion back in 2017 as the customer is looking to upgrade its production capability to 8-inch wafers from the current 6-inch wafers.

KGB will be tasked to build an onsite industrial gas generator to produce and supply three types of gasses, mainly, hydrogen, oxygen and nitrogen at the customer’s facilities in Kulim which will commence in 1Q 2023. The group will also be involved in the gas treatment process to achieve the ultra-high purity level that is required in the semiconductor industry.

Strengthening its recurring income stream. We are positive on the LOI as the group continues to see growing demand for its industrial gas segment which yields a lucrative GPM of 30% (twice the margins of its UHP business segment). Moreover, the potential 10-year contract will provide the group with a stable recurring income, further enhancing the group’s earnings visibility. Just two years into its industrial gas segment, revenue has grown 4x from RM8m in FY19 to RM34.5m in FY21 with its LCO2 utilisation at 60%. Moving into 2022, demand for its LCO2 continues to increase and the group aims to achieve a higher utilisation of c.75%. KGB’s outstanding orderbook stands at RM1.1b as of 4QFY21.

China’s sporadic lockdowns. Despite China’s hard implementation on its zero-Covid policy, we learnt that works on the ground continue to carry on as workers are quarantined onsite with necessities provided. While such arrangements come at a cost of slight inefficiencies, albeit temporarily, we believe the contribution from China will remain healthy. We expect a commendable double-digit YoY growth in its upcoming 1QFY22 results.

Maintain FY21E earnings but raise FY22E earnings higher by 14% to RM45.0m to account for higher job wins coming from its all-time high tenderbook of RM1.9b.

Maintain our OUTPERFORM call and Target Price of RM1.90 on FY22E PER of 27x (+1SD to 5-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 - 27 Apr 2022