RHB Research maintains Neutral with a target price of RM1.75, a 1% upside, while the outlook remains positive on Kelington’s earnings prospects – with a record-high order book of over RM1.2 billion – its 2022 price earning being at +1.5SD from the historical 5-year mean, suggests the upside is in the price. RHB target price has factored in a 4% ESG discount which is reflective of the still-buoyant outlook for the chip sector going into the year.
Key risks include a sector-wide de-rating, stronger/weaker-than-expected order wins. Riding on the coattails of the global fabrication capacity expansion.
Over in Singapore, where it is the leading ultra-high purity engineering specialist, KGB has bagged multiple contracts valued in excess of RM300m from Global Foundries, Micron, and Siltronics (collectively, Singapore orders made up 39% of its outstanding order book). Management is hopeful of securing new hook-up jobs from China’s largest foundry, Semiconductor Manufacturing International Corporation, which had earlier unveiled plans for a new US$9 billion plant in Shanghai.
In Malaysia, the group will focus on executing the landmark RM420m contract in Sarawak for Western Digital. Margins set to be maintained. We expect KGB to sustain its margins, given management’s focus on more profitable/higher-yield contracts and improving offtakes for the industrial gas segment. With the large chunk of the outstanding orderbook linked to WD, general contracting (GC) works now contribute about 36% of outstanding orderbook vs 57% for UHP and process engineering (7%).
Historically, the higher-margin UHP segment contributed 70% of its order book. Kelington management has maintained the guidance for GP and NP margins at 15% and 5%. Looking at other specialty gases, it has obtained halal certification from the Department of Islamic Development Malaysia. While it is a pre-requisite to venture into the lucrative F&B segment, the expansion would be managed carefully so as not to trigger a competitive response from the industry leader (Linde Malaysia). Its liquid carbon dioxide (LCO2) plant utilisation rate rose to 60% (50,000 tonnes pa capacity) in 3Q21 from <50% in 1H21, with the opening up of economic activities under the National Recovery Plan. RHB expects the utilisation rate to reach 80% on stronger export orders.
Management is eyeing other specialty gases and will be adding more skid tanks for the transportation of LCO2 to Singapore. …and LCO2 for durian freezing. A new and potentially lucrative segment being explored is the freezing of durians for the export market using LCO2 which appears to be a more efficient alternative to liquid nitrogen.
Frozen durians are a key component of Malaysian exports, with 30,000 tonnes of durian valued at RM74.1 million exported in 2020.