We maintain our FY22E/FY23E earnings forecasts and reiterate our OUTPERFORM call on Kelington Group Berhad (KGB) with an unchanged target price of RM1.90 on FY23E PER of 27x, which represents a slight premium to regional peers’ average (such as PNC Process Systems and Shanghai Gentech) of 24x. We believe our valuation is justified by the group’s dominant presence in Malaysia and Singapore which represents c.86% of its outstanding orderbook. In addition, its LCO2 plant utilisation rate remains elevated at 70% on higher export demand due to inefficient supply among neighbouring countries.

Secured another job win from a semiconductor customer:

1. KGB has recently announced another job win worth RM114m from a Switzerland-based semiconductor customer that is looking to expand its facility in Muar, Johor. The job is similar to a turnkey arrangement, albeit at a much smaller scale to the RM420m turnkey job in Kuching, Sarawak. KGB will undertake the design, engineering and construction works which consist of a plating area, mechanical and electrical utilities plant, and multi-storey carpark. While this is not a new customer to KGB, the previous engagements were relatively small in value and this is the first time being awarded such a large job award, which we believe is a testament of the group’s strong track record in the semiconductor space. The job will commence immediately and is slated to be completed by December 2023.

2. Meanwhile, the group has also been receiving new awards from the largest semiconductor wafer fab in China over the past two months for hook-up jobs. Given that KGB is the sole winner for all five wafer fab sites (across Tianjin, Beijing, Shanghai, Shenzhen), we anticipate more hook-up jobs to follow in the coming months as the customer continues to remain aggressive on increasing its wafer output capacity.

3. Including the new job win, KGB’s YTD order wins have soared to RM700m (vs. RM1.19b in FY21), outpacing the replenishment run rate in FY21 by 18%. This brings its current orderbook to RM1.6b which will likely translate into another record year in FY22.

Maintain FY22E/FY23E earnings forecast at RM44.2m and RM45.0m respectively. Given the sporadic lockdowns in China, we learnt that job progress remains on track with minimal disruption as workers are quarantined on site. In fact, certain areas are starting to see some relaxation on SOPs which will translate positively in the upcoming quarter.

Maintain our OUTPERFORM call and target price of RM1.90 on FY23E PER of 27x. We continue to like KGB for its: (i) unique proxy to the frontend semiconductor space, (ii) strong track record which continues to attract large MNC customers, and (iii) venture into the industrial gas segment which has high barriers to entry and yields very lucrative margins.

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 - 17 Jun 2022