• Maintain BUY, new MYR2.64 TP from MYR2.16, 13% upside with c.2% FY23F yield. Kelington Group has announced its first ultra-high purity (UHP) contract win for the year from China. With this latest win, its outstanding orderbook stands at MYR1.85bn, reflecting a FY22 cover ratio of 1.4x. Our TP is now based on a higher target P/E of 21x FY24F EPS, supported by tailwinds in the wafer fab industry, and KGB’s improved earnings delivery and margin prospects.

• An auspicious start. Wholly owned subsidiary Kelington Engineering (Shanghai) has secured a UHP contract for the design, procurement, construction, and commissioning of a gas hook-up system in Shanghai. The MYR143m contract was awarded by a long-time principal customer (China’s largest semiconductor foundry) and is testament to the group's strong enviable track record and leadership in delivering engineering solutions. Work is slated commence this month with a Jan 2026 target completion.

• We remain upbeat on the group’s earnings prospects in the medium- to longer-term. KGB’s exposure in the front-end of the chip value chain ostensibly shields it from the inventory correction/adjustments plaguing the broader semiconductor sector. The US-China trade tiff further strengthens its position as the East Asian nation forges ahead in its quest to be technology-independent and self-sufficient. Including the latest win and several other jobs inked in 4Q23 across China and Singapore, the group’s outstanding orderbook stands at MYR1.85bn vs MYR1.51bn as of end Sep 2023. This should keep KGB busy over the next 12-18 months. We believe the latest contract offers similar GPMs with other UHP jobs of c.20%. Going forward, management’s focus on higher-margin projects should continue to fuel earnings with the timely expansion of the liquid carbon dioxide (LCO2) plant (testing and commissioning phase) set to propel the next leg up in earnings. The latter is underpinned by the insatiable demand from Oceania, which offer c.2x higher margins vis-à-vis KGB’s conventional businesses.

• Higher target P/E given the more positive stock sentiment. We lift FY23-25F core earnings by c.3-6% after factoring in incrementally higher margins and stronger billing momentum. Our new TP of MYR2.64 is based on a higher target P/E of 21x on FY24F EPS (previously 18x), at a smaller -0.5SD to the KLTEC 5-year mean. This is to reflect the promising fab outlook, robust outstanding orderbook, the expansion of the industrial gases segment, and overall better market sentiment. A 2% ESG premium is baked into our TP based on our proprietary scoring model.

• Key downside risks are weaker-than-expected earnings, project execution delays, and lower than-expected LCO2 demand and orderbook replenishment.

Source: RHB Research - 10 Jan 2024