Kenanga Research is highly optimistic of Kellington Group Bhd’s (Kellington) unit new RM143 million service contract win in China as it is in the view that it further solidifies the group’s dominant position in the region.
“We maintain our forecasts, TP of RM3.28 and OUTPERFORM call. KGB is one of our top picks for the tech and tech-related sector given its ability to consistently deliver strong earnings as it approaches the next semiconductor wave.,” it said its Company Update today (Jan 10).
It added that the TP is based on an unchanged 21x FY24F PER and its valuation represents a 10% discount to peer’s forward mean PER of 24x which includes global players such as Air Products, Air Liquide and Linde.
“There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.”
Kellington announced yesterday that it has bagged its first contract in FY24, for a RM143 million gas hookup service contract (involving design, procurement, construction, and commissioning) for China’s largest semiconductor wafer foundry located in Shanghai, which will fall under its ultra high purity(UHP) (gases and chemicals) business segment.
The commencement of the contract is immediate, with a scheduled completion period spanning two years, concluding in Jan 2026.
“This is in addition to same service contract renewals for five other foundries of the same customer late last year to be delivered over the next 12 months.
“We are very optimistic about Kellington’s latest job win, which marks a strong start towards achieving our targeted RM1 billion order replenishment for 2024.
“The new contract will be added to the group’s existing RM1.5 billion outstanding order book, while its tender book remains elevated at more than RM2.1 billion,” Kenanga said.
The research house said the robust tender pipeline is in line with the Semiconductor Equipment and Materials International (SEMI) forecast of a 12% recovery in 2024, followed by a substantial 24% upcycle in 2025.
“The group has also commenced the testing and commissioning of its LCO2 (liquid CO2) Plant 2, with a capacity of 70,000 tonnes per year,
representing 1.4 times that of Plant 1.
“As it finalises the testing phase in the next couple of weeks, the group will be able to alleviate the bottleneck at Plant 1, which is currently running near 100%, and address the overwhelming demand in Asia and the Oceania region, exacerbated by the worsening shortage of LCO2,” it said.
It added: “We like Kelington being a direct proxy to the frontend wafer fab expansion, its strong earnings visibility underpinned by
robust order book and tender book exceeding RM1 billion, and its strong foothold in multiple markets including Malaysia and China.”
The risks to Kenanga’s call include chip makers halting their expansion plans due to oversupply, worsening Sino-US chip war, and delays in its LCO2 plant expansion.
