We maintain our FY22E and FY23E earnings forecasts and OUTPERFORM recommendation for Kelington Group Berhad (KGB). Our target price remains unchanged at RM1.90 on 27x FY23E PER, representing a slight premium to regional peers’ average (e.g. PNC Process Systems and Shanghai Gentech) of 24x. We believe our valuation is justified as the group continues to be the preferred vendor by China’s largest wafer foundry as well as having a dominant presence in Malaysia and Singapore. Also, demand for its LCO2 remains elevated as utilisation rate stands at 70% and is on track to reach 80% by end-2022.

Secured hook-up job for China’s largest semiconductor wafer fab:

1. Hot on the heels of a recent turkey project win in Johor, KGB has announced yet another job award worth RMB94m (c.RM62m) from China’s largest semiconductor wafer fab, specifically for its Shanghai foundry that has the capability of producing chips with 14nm process. KGB is tasked with the hook-up job which involves the integration of UHP (ultra-high purity) gas delivery systems to the wafer fabrication machinery. The job will take nine months starting from June 2022 till March 2023.

2. We learnt that the customer in China remains very aggressive in its expansion plan, allocating a record high US$5b capex (vs. US$4.5b in 2021) after logging all-time high earnings in 2021. The expansion is part of the customer’s plan to triple its wafer production capacity

3. After including this RM62m job award, KGB’s YTD order wins have further ballooned to RM762m (vs. RM1.19b in FY21), representing 95% of our estimated replenishment for FY22. This brings its current orderbook to RM1.66b which will likely translate into another record year in FY22.

Maintain FY22E and FY23E earnings forecasts at RM44.2m and RM45.0m, respectively. This job award from the Shanghai foundry provides a positive indication that the lockdown measure there has eased which bodes well for KGB’s job progress in China.

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 resurgence, (ii) downturn in semiconductor sales, and (iii) delay in liquid CO2 ramp up.

Source: Kenanga Research - 21 Jun 2022