Summary

• Kelington Group Bhd’s (KGB) 2QFY23 core net profit added 40.6% YoY to RM19.1m, boosted by higher contribution from the Ultra High Purity (UHP) and industrial gas segments. Revenue for the quarter climbed 36.0% YoY to RM424.9m. A first interim dividend of 1.5 sen per share, payable on 2nd October 2023 was declared.

• For 6MFY23, core net profit at RM35.3m came above our and consensus expectations of RM59.4m and RM63.0m respectively. The better-than-expected performance was mainly driven by the better margins from segmental mix, coupled with the strong recognition of on-going UHP segment. In 2QFY23, KGB maintained a healthy balance sheet with a low net gearing of 0.02x.

• During the quarter, bulk of the revenue (68.1%) were derived from the UHP segment, followed by the general contracting (18.3%), industrial gas (6.8%), process engineering (6.0%), equipment & materials (0.8%) and services segment (0.1%). Moving forward, we expect the UHP segment to remain as the biggest contributor, given that their current outstanding orderbook is skewed towards the UHP segment.

• We gather that orderbook replenishment stood at RM744.0m in 1H23 accounts to 62.0% of our assumption of RM1.20bn. As at end-2Q23, KGB’s outstanding orderbook of RM1.77bn that represents and orderbook to cover ratio of 1.4x against FY22 revenue of RM1.27bn will sustain earnings visibility over the next 2 years.

• Meanwhile, tenderbook remain relatively healthy at above RM1.00bn, with key semiconductor players in the ASEAN region remain on course in their expansionary plans. We expect the industrial gas segment to generate higher contribution from the 10-year industrial gas supply contract to a prominent optoelectronics semiconductor player valued RM180.0m that commenced in 1Q23. Looking ahead, the second LCO2 plant is largely on track for commercial production in 4Q23 will also boost the aforementioned segment.

• Global semiconductor saw mild recovery following the recent downturn with sales in 2Q23 rose 4.7% QoQ to USD124.5bn. This highlights that demand has gradually improved. While the likelihood of recovery is in place, we remain cautious following the stickiness of inflationary pressure resulting in high interest rates environment may impact demand and economic recovery.

Valuation & Recommendation

• While the reported earnings came above expectations and outlook remains upbeat that is supported by their solid orderbook, we are ceasing coverage on KGB due to the relocation of internal resources. Our last recommendation was BUY with a fair value of RM1.85.

• Our target price is derived by assigning a targeted P/E multiple of 20.0x to FY23f EPS of 9.2 sen. The assigned targeted P/E multiple is slightly below the valuations of the technology sector that is trading at 23.5x for 2023.

Source: Mplus Research - 21 Aug 2023