Kelington Group Bhd (KGB) is an integrated engineering solutions provider specializing in ultra-high purity (UHP) gas and chemical delivery systems, mechanical process engineering, mechanical systems and electrical systems. Driven by progress billing of outstanding orderbook, we expect KGB to register net profit of RM22.9m and RM39.2m for FY21 and FY22 respectively. BUY with a target price of RM2.06 based on 33.8x PER (based on FY22 forward PER of Bursa Technology Index) over FY22 EPS.

KGB has more than 20 years of experience with an established track record in UHP to serve the semiconductor industry. It builds the gas/chemical delivery systems for new fabrication facilities as well as connects new equipment & tools to existing fabrication facilities with upgraded delivery systems. We see huge growth potential for its UHP segment as more fabrications to come onstream amid global chips shortages as capital expenditure spending is rising rapidly in Asia. With its record high tender book of RM1.1bn, the Group is focusing on bidding for semiconductor wafer fab projects in both China and Singapore, which currently represents its largest revenue contributor.

As at October 2021, the Group has an outstanding orderbook of RM979m, of which 58% comprise of data project in Malaysia. Following the uplift of Movement Control Orders (MCO) in Malaysia, we expect KGB to remain busy executing its current orderbooks at hand. According to management, it is also seeing increase in tender invitations for process engineering work from MNC companies who are expanding in Malaysia.

KGB also manufactures liquid CO2 (LCO2) and dry ice. It has signed a 15- year supply agreement with Petronas to purchase waste CO2 gas to sell to re-fillers and F&B industry or process it into dry ice. The Group is now in the final stage of securing the Halal Certification from JAKIM to start qualification process to the F&B industry. We believe some contribution from this segment soon when the qualification process is done backed by pent up demand post MCO.

The company has a healthy balance sheet with net cash per share of 8 sen as at 1HFY21. There is also room for further expansion with low gearing ratio of 0.3x. Our buy recommendation is premised on: (i) outstanding orderbook of RM979m; (ii) potential job win in the pipelines; (iii) potential growth in UHP segment following the rising demand for chips; and (iv) its net cash position.

Source: Rakuten Research - 3 Nov 2021