KGB has secured its first job win of the year, a RM170m contract to build a semiconductor facility in Sarawak, for a Belgium-based company which produces microelectronic semiconductors for a wide range of applications in the automotive industry. The new facility is part of a collaboration with the Sarawak government to enhance the industrial ecosystem and create high-skilled jobs in the area. We expect a replenishment of c.RM1b in FY23 in addition to its current outstanding order book of RM2.27b. We maintain our forecasts, TP of RM1.80 and OUTPERFORM call.

1. Kelington Group (KGB) starts the year with a RM170m contract win from a Belgium-based client which supplies microelectronic semiconductor solutions that is being used in a wide range of applications in the automotive industry. The job encompasses a wide range of responsibilities, including architectural and structural design, civil engineering, mechanical and electrical systems, and various process utilities work, all in support of the construction of an integrated chip manufacturing facility located at the Sama Jaya Free Industrial Zone in the city of Kuching in the state of Sarawak.

2. The scope of this job which falls under the general contract businesses segment will commence immediately with an expected completion date of March 2024. We gather that the customer’s expansion is in collaboration with the Sarawak Education, Innovation and Talent Development Ministry to create high-skilled jobs and enhance Sarawak industrial ecosystem. The Sarawak government also hopes for this partnership to extend into the technical institution and universities in Sarawak to establish new curriculum focused on the field of semiconductor technology for both undergraduate and graduate students

3. This contract marks the first win of the job for KGB as we estimate order replenishment for FY23 to be at c.RM1b. The group’s current outstanding order book stands at RM2.27b (before recognising 4QFY22 revenue) which provides for a strong earnings visibility.

Forecasts. Maintained.

Investment thesis. We continue to like KGB for its: (i) unique proxy position 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 entry barriers and yields very lucrative margins.

Maintain our OUTPERFORM call with an unchanged target price of RM1.80 on FY23F PER of 22x (in line with its peers’ forward average). There is no adjustment to our TP based on ESG given a 3-star 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) delays in liquid CO2 ramp up.

Source: Kenanga Research - 11 Jan 2023