• BUY, new MYR1.60 TP from MYR1.50, 33% upside with c.1% FY22F yield. Kelington Group’s core earnings are on track to hit another high in FY22F (+59%), being armed with an outstanding orderbook of MYR1.2bn and a still-robust job pipeline. Post its 1Q22 results call, we lift FY22F-24F core earnings by 4-6% after raising our orderbook replenishment assumptions. Our TP is pegged to 28x FY23F fully diluted EPS with a parity ESG score imputed, in line with the country median.

• Orderbook and tenderbook in excess of MYR1bn. KGB’s current tenderbook stands at MYR1.4bn, with Singapore accounting for the lion’s share (c.MYR1.1bn), followed by Malaysia (MYR200m) and China (MYR100m). About 60-70% of its tenderbook are ultra-high purity (UHP) jobs. We gather there is scope for an additional MYR300-400m hook-up jobs from China that are likely to be awarded in batches moving into FY23F. Of the outstanding orderbook of MYR1.24bn (1Q22), 46% comes from Singapore (MYR569m) while Malaysia accounts for c. 41% (MYR512m) – the latter largely made up the chunky MYR420m general contracting (GC) job in Sarawak, where billings are likely to peak in 2H22. .

• YTD new orders at c.40% of FY21’s record of MYR1.2bn. New orders secured YTD have exceeded MYR450m (1Q22: MYR347m). These include MYR80m hook-up works for China’s largest wafer foundry and a MYR38m base-build job for a US-based chipmaker in Penang. Assuming a doubling up of new orders in 2H22, full-year new orders could potentially still hit c.MYR1bn. That said, overall group margins may be diluted somewhat, as c.30% of the orderbook is made up of the Sarawak GC job where several recalibrations of the project scope had been undertaken.

• Gassing up. Its LCO2 plant utilisation rate continues to be on an uptrend (1Q22: 70%), thanks to stronger economic activities, and on track to hit the 80% target for FY22F. LCO2 supplies have expanded beyond Malaysia and Singapore, to Australia and New Zealand. Management said it will look to expand capacity when utilisation reaches 80-90%. On the recently secured on-site job in Kulim, the installation of generators is underway, with gas supply expected to kick off in 1Q23.

• We raise FY22F-24F core earnings by 4-6% after lifting our orderbook replenishment assumptions. This is partially tempered by lower margins assumed for FY22, given the larger proportion of GC works to be recognised. Management indicated that the impact from rising input costs is manageable, as these are built into project tenders at the outset. Key downside risks are: Weaker-than-expected orderbook replenishment, lower-than-expected margins, and faster-than-expected normalisation of the demand-supply imbalance in the chip sector.

Source: RHB Research - 3 Jun 2022