Kenanga Research & Investment

Kelington Group - First Chemical Supply System Job

Publish date: Fri, 28 Apr 2023, 09:36 AM

KGB has secured a RM102m contract from a US client to supply a customised chemical delivery system for a new manufacturing facility in Singapore, marking its first customised chemical delivery system built and assembled in-house. This speaks for its value proposition in offering value-adding services to its customers. The latest contract has boosted its YTD job wins to RM596m, lifting its outstanding order book to RM2.23b that will keep it busy for the next two years. We maintain our forecasts, TP of RM1.92 and OUTPERFORM call.

KGB has clinched another ultra-high purity (UHP) delivery system award worth RM102m from a US client that is building a new manufacturing facility in Singapore worth USD100m. KGB is tasked with the supply of a fully customised chemical delivery system which will commence in April 2023 and to be completed by March 2024. The customer specialises in high-tech filtration solutions that are used in various industries such as semiconductor, biopharmaceutical, F&B and aerospace.

This contract is rather significant in terms of brand recognition as it marks KGB’s first chemical delivery system and is fully built and assembled inhouse from its subsidiary — KE Systems Integration (Chuzhou) Co., Ltd — in China which has its own cleanroom and fabrication facility. Having such inhouse capability coupled with the validation of a prominent US client, this is expected to further elevate the group’s value proposition in the industry.

Following the win of this recent award, the group’s year-to-date order replenishment now stands at RM596m which is highly promising given that it is just 4 months into FY23. With a strong tender book of RM2b, we are sanguine that the group is on track to achieve RM1b replenishment for the year. Also, its current outstanding order book, which includes projects carried forward from the prior year, has grown to RM2.23b which provides solid earnings visibility for the next two years.

Forecasts. Maintained as we assume job wins of RM1b for FY23F.

We also keep our TP of RM1.92 based on an unchanged 22x FY23F PER, in line with its peers’ forward average. The sector’s forward PER is the average of regional peers, i.e. PNC Process Systems and Linde. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment thesis. We like KGB for: (i) it being a direct proxy to the frontend wafer fab expansion, (ii) its strong earnings visibility underpinned by robust order book and tender book exceeding RM1b, and (iii) its strong foothold in multiple markets, i.e. Malaysia, Singapore and China. Maintain OUTPERFORM.

Risks to our call include: (i) chip makers halting their expansion plans due to oversupply, (ii) worsening Sino-US chip war, and (iii) delays in its LCO2 plant expansion.

Source: Kenanga Research - 28 Apr 2023

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