KGB has defied the noises of slowdown in semiconductor expansion with another RM117m job win which entails the provision of bulk and specialty gas distribution system to a USlisted semiconductor customer known for its solid-state memory products. We are positive on this award, bringing its YTD wins to c.RM950m which meets our FY22 assumption. KGB’s current orderbook has ballooned to RM1.85b, paving for a smooth journey for another record year. Maintain earnings forecast and OUTPERFORM call with an unchanged Target Price of RM1.90.

Another significant win, a new record year in the making

1. Kelington Group (KGB) has continued to defy the negative noises in the market regarding semiconductor expansion slowing down by extending its job wins with another award worth c.RM117m from a US-listed semiconductor customer known for its solid-state memory products. The job entails the provision of both bulk gas and specialty gas distribution system to the customer’s new fab in Singapore which will be recognised under its ultra-high purity (UHP) business segment. The contract will begin immediately in August 2022 until June 2024.

2. Despite the market’s fear of chip oversupply, we learnt that actual fab expansion on the ground has continued on. This is also echoed by the group indicating that the shortage of critical semiconductor chips remains very real and wafer fabs are still seeing the necessity to carry out their expansion plans, which will in turn provide more opportunities for KGB.

3. Including this RM117m job win in Singapore, KGB has chalked up a commendable YTD order wins of RM950m which is largely within our expectation for FY22. This represents 80% of FY21’s replenishment of RM1.19b (a record high) despite the absence of major turnkey projects this year. The group’s current orderbook has now ballooned to RM1.85b which will pave for a smooth journey for another record year in FY22.

Maintain FY22F and FY23F earnings forecasts at RM44.2m and RM44.9m, respectively.

Maintain our OUTPERFORM call and target price of RM1.90 on FY23E PER of 27x, representing a slight premium to regional peers’ average (e.g. PNC Process Systems and Shanghai Gentech) of 24x. We continue to like KGB for its: (i) unique proxy to the front-end 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. There is no adjustment to TP based on ESG (given a 3-star ESG rating as appraised by us).

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 - 5 Aug 2022