• Keep BUY, with new MYR1.69 TP from MYR1.60, 42% upside. We raise our TP and earnings forecasts after bumping up our orderbook replenishment assumptions to factor in stronger-than-expected YTD project wins. The structural fab capacity expansion and prevailing tight supply situation globally should keep Kelington Group (KGB) busy over the next 18 months, with a burgeoning MYR1.6bn orderbook at hand. Our TP bakes in a parity ESG score, based on our in-house methodology.

• Exceeding MYR1.6bn outstanding orderbook and growing. KGB saw a slew of contract wins in 1H22, valued at c.MYR762m. This already made up 64% of FY21 order wins and looks to be on track to surpass the previous record by end-4Q22. Notable contract wins to-date include: i) A MYR114m general construction (GC) job for a European semiconductor manufacturer for the design, engineering and construction works in Johor, and ii) a MYR62m gas hook-up job for China’s largest chip foundry, the second after an earlier award in May (MYR80m). We expect further orderbook replenishment (likely in successive batches) over the next couple of months and into FY23F, supported by the latest tenderbook of >MYR2bn.

• Stellar 2Q22 expected. Despite being a seasonal lull, 1Q22 revenue was the highest ever achieved by the group for the same quarter (+65% YoY), while core earnings surged 45% YoY. This was fuelled by a more than doubling of general contracting (GC) revenue, mainly from a chunky MYR432m turnkey job from a leading hard drive maker secured last September. We expect 2Q22 core earnings (to be announced on 15 Aug) to jump 18-30% YoY on stronger project recognition in Singapore, Malaysia and China, as well as margins.

• Prolonged upcycle. The drawn-out Russian-Ukrainian conflict should see the chip shortage persist until 2024, according to SEMI. KGB should continue to ride on the coattails of the fab capacity expansion globally, being a core engineering solutions provider with a leading share of the Singapore and China markets. China’s zero-COVID policy has thus far not disrupted job orders with sufficient materials available on-site. We see the risk from rising material costs being mitigated by shorter tender periods for ultra-high purity (UHP) projects where cost escalations are built into project cost at the outset.

• Forecasts and TP raised. We lift FY22F-24F core earnings by 2-11% after bumping up our orderbook replenishment assumptions by 11-38%. This lifts out TP to MYR1.69, which is still based on 28x FY23F fully diluted EPS. We continue to see KGB as a strategic proxy to the structural expansion in wafer foundry capacity (front-end), arising from the tight supply situation. Key risks are lower-than-expected margins, faster-than-expected normalisation of the demand-supply imbalance in the chip sector, and weaker orderbook replenishment.

Source: RHB Research - 28 Jul 2022