• Maintain BUY and TP of MYR1.70, 50% upside. Kelington Group is on track for another bumper year. We see FY22F core earnings growing 40% (FY21: +108%), with billings reaching another milestone. Our TP is premised on 32x FY22 FD EPS with parity ESG adjustment based on our latest review. The sharp sell down due to the prevailing risk-off sentiment is a good buying opportunity. Key risks are weaker-than-expected earnings/orderbook replenishment, and faster-than-expected normalisation of demand-supply imbalance in the chip sector.

• • Good runaway still. Management reaffirmed its strong earnings narrative at the post 4Q21 results briefing yesterday. Key takeaways/observations: i) The uptrend in wafer foundry (fab) equipment spending from secular demand and ongoing capacity expansion is set to continue into 2024 based on SEMI’s projection, ii) manageable impact from higher input cost (built into project tenders at the outset), and iii) robust growth of the industrial gas segment. Despite resources being stretched thin from record orders, management sees a decent runway still for new projects, with better lead times from existing jobs.

• • Over MYR1.3bn outstanding orderbook to date. KGB’s outstanding orderbook to date includes hook-up jobs from China’s largest wafer fab for five sites, where a formal award is pending. Excluding this, the c.MYR1.3bn tenderbook comprised of new hook-up jobs from Micron, Global Foundries (GF), and Siltronics, for which base-build projects were secured in FY21. As the incumbent in Singapore, KGB is also well placed to secure base build contracts for United Microelectronics Corporation’s (UMC) new USD5bn 22/28 nanometre (nm) fab when the tender opens. In Malaysia, key tenders include Intel’s new fab in Bayan Lepas, Penang (Intel–Pelican project), which forms part of the chip maker’s USD7bn investment over 10 years; Infineon’s expansion (Melaka/Kulim); Austrian-based Austria Technologie & Systemtechnik AG (AT&S) plant, and Silterra (Kulim).

• LCO2 update. KGB said supply to the F&B industry has commenced, albeit, on a small scale (negotiations are ongoing on long-term supply agreements). Management expects a further uplift in plant utilisation to 80% in FY22F (FY21: 60%) as the economic recovery gathers momentum.

• Forecast and ESG adjustments. We tone down FY22F by 5.2% after factoring a slight delay in the MYR420m (30% of orderbook) turnkey general contracting job for a global data storage player in Sarawak due to a change in design specifications. FY23F-24F core earnings are raised by 14-15% as we now assume higher orderbook replenishments. We adjust KGB’s ESG scoring to 3.0 (from 2.8), at parity with the country mean to reflect the halal certification obtained for its gas business and the recent inclusion as a constituent of the FBM4Good Bursa Malaysia Index.

Source: RHB Research - 9 Mar 2022