KGB: Higher high formation

UHP segment to perform strongly, supported by the anticipated rebound in semiconductor sales (with the WSTS forecasting a 13% increase for 2024) and the China +1 strategy benefiting Southeast Asian (SEA) players like Malaysia and Singapore. With an order book of RM1.5bn as of November 23, KGB is poised to report strong earnings for FY24-25, with additional opportunities for order replenishment in the future, supported by a high tender book of RM2.17bn. Management sees plenty of job opportunities in Singapore, Malaysia, and China markets. This optimism is bolstered by the ongoing expansion pipeline in global semiconductor players such as GlobalFoundries, SMIC, and Infineon, announced in 2023, despite the down cycle in semiconductor sales. This expansion is mainly driven by the China +1 strategy and the prolonged US-China trade war, which has prompted China to invest in its semiconductor capabilities. These events have opened up more UHP contract opportunities, as these gases are crucial for semiconductor fabrication processes such as photolithography and etching.

Second LCO2 plant to come online. To recap, KGB has committed to invest RM45m in setting up its second LCO2 plant (P2) in Kerteh, Terengganu, following the success of its first LCO2 plant which began operations in 2019 and achieved an 80% utilization rate in 1H22. With P2 currently in the final stage of testing and expected to come online soon, the addition of 70k tonnes per year (bringing total capacity to 120k tonnes per year) will boost the group’s FY24 earnings. With P1 currently operating at full capacity, P2 will alleviate this bottleneck, enabling the group to capitalize on the increasing demand for LCO2 in the Asia and Oceania region, given the worsening shortage of LCO2 following the closure of petrochemical plants globally. Additionally, it's worth noting that the industrial gas business offers stable recurring income with a superior margin (industrial gas GPM: 30% vs UHP: 15%).

New wave on the making. KGB is poised to establish a higher high formation, reinforced by bullish indicators. A successful breakout above RM2.40 will spur the price toward RM2.50-2.57-2.68. Cut lost at RM2.09.

Collection range: RM2.16-2.20-2.32

Upside targets: RM2.50-2.57-2.68

Cut loss: RM2.09

Source: Hong Leong Investment Bank Research - 19 Feb 2024