KUALA LUMPUR (Jan 10): RHB Investment Bank Bhd (RHB IB) has raised its target price (TP) for Kelington Group Bhd by 22% to RM2.64 (from RM2.16), as the research house remains upbeat on the group’s prospects, supported by tailwinds in the water fab industry, improved earnings delivery and margin prospects.

In a note, the research house said the integrated engineering services provider's exposure in the front-end of the chip value chain ostensibly shields it from the inventory correction or 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,” said RHB IB, which maintained its "buy" recommendation for Kelington.

Kelington secured its first ultra-high purity contract for 2024 that entails the engineering, procurement, construction and commissioning of a gas connection system in Shanghai, China.

The RM143 million contract was awarded by a long-standing major customer, the largest semiconductor foundry in China.

With this latest contract, Kelington’s order book stands at RM1.85 billion — reflecting a cover ratio of 1.4 times for the financial year ended Dec 31, 2022 (FY2022) — compared to RM1.51 billion as of end-September 2023, which is expected to keep the group busy over the next 12 to 18 months.

RHB IB’s TP of RM2.64 for Kelington is based on a higher price-to-earnings (P/E) ratio of 21 times FY2024 forecast earnings per share, supported by tailwinds in the wafer fab industry, improved earnings delivery and margin outlook.

“We lift FY2023-FY2025 forecast core earnings by circa 3%-6% after factoring in incrementally higher margins and stronger billing momentum. A 2% ESG (environmental, social and governance) premium is baked into our TP based on our proprietary scoring model,” said the research house in a note.

“Going forward, management’s [Kelington] 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 circa two times higher margins vis-à-vis Kelington’s conventional businesses,” it added.

At the time of writing on Wednesday, shares of Kelington were down one sen or 0.43% to RM2.33, valuing it at RM1.51 billion.