We were positively surprised by KGB’s announcement of two contract wins; (i) RM170m turnkey job for a bulk liquid terminal in Port Klang, and (ii) RM90m contract for the supply of ultrahigh purity (UHP) gas delivery systems for a semiconductor plant in Beijing which is involved in the design and manufacturing of dynamic random access memory (DRAM). Both jobs totalled to RM262m, bringing its YTD job wins to RM1.62b which surpassed our expectation, while orderbook stands at RM2.22b. We raise FY23F CNP by 8%, leading to a higher TP of RM1.75 (from RM1.70). Maintain OUTPERFORM.

1. Amidst the gloomy sentiment on tech stocks cast by news media, Kelington Group (KGB) continues to prove otherwise with two new contract wins worth RM262m in total. The first contract worth RM170m was awarded by a world-renowned company involved in storage services for bulk liquid and gasses. The job is recognised under its process engineering segment as it is a turnkey design and build service of a bulk liquid terminal in Port Klang, Malaysia, which will commence in November 2022 until October 2024.
2. The second contract worth RM90m was awarded by a semiconductor company that specialises in integrated design and manufacturing of DRAM. KGB is tasked with the installation of bulk gas delivery systems for the customer’s plant in Beijing. This job will be categorised under the group’s UHP segment, commencing November 2022 until September 2023. We also learnt that KGB’s jobs in China are still progressing on schedule as planned without any major interruption from the on-going lockdowns.
3. Both contracts totalling RM262m brings the group’s YTD job replenishment to a new high of RM1.62b (vs. RM1.19b in 2021) which exceeded our expectations. We were pleasantly surprised by the group’s ability to continue securing job awards despite the current market climate. All in, the group’s outstanding orderbook has grown to RM2.22b, providing for a very solid earnings visibility even into 2024.

Forecasts. Raised FY22F and FY23F earnings by 3% and 8%, respectively, to factor in the higher-than-expected order replenishment.

Maintain our OUTPERFORM call with a higher target price of RM1.75 (previously RM1.70) on FY23F PER of 23x (in line with peers’ forward average). 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 our TP based on a 3-star ESG rating as appraised by us (see Page 4).

Risks to our call include: (i) slower revenue recognition due to on-going Covid-19 lockdowns in China, (ii) further cut in semiconductor capex, and (iii) delay in liquid CO2 ramp up.

Source: Kenanga Research - 3 Nov 2022