• KGB’s 6M20 earnings within our expectations, but missed consensus estimate
• Weakness largely attributed to lockdowns imposed in Malaysia and Singapore, partly offset by resumption of activities in China. Liquid carbon dioxide (LCO2) plant utilisation has fallen from 50% in 1Q20 to 14% in 2Q20
• Reiterate our Buy rating with an unchanged 12-month target price of RM1.22, pegged to 21x FY21E EPS.

Malaysia and Singapore Activities Halted by Lockdowns

KGB’s 2Q20 revenue was weaker by 19% yoy, affected by lockdowns in Malaysia and Singapore, but partly mitigated by the resumption of activities in China. Operating margin was down 7.8ppts yoy amid the slowdown in activities. The decline in Singapore activities was also a main factor as they command the highest margins among the region. On the back of weaker revenue, 2Q20 core net loss came in at RM1.7m, after adjusting for RM1.7m in a one-off Singapore government subsidy. KGB reported a small core profit of RM0.7m in 6M20 (vs. 6M19: RM10m profit).

Most regions reverted to pre-COVID levels, but Singapore still facing setbacks

Both Malaysia and China operations have reverted to their pre-COVID efficiency levels, but Singapore is still affected due to the government’s restriction on foreign workers from different dormitories operating on the same site. The LCO2 plant utilisation fell from 50% in 1Q20 to 14% in 2Q20, but has since climbed to 35% in July 2020. Supply to Singapore is still disrupted, but partly offset by new clients in Malaysia during the MCO period.

Order Book Update

The outstanding order book stood at RM324m (April 2020: RM322m) as of July 2020, with the UHP segment making up 67% of the total, followed by PE and GC at 17% and 16% respectively. By country, Malaysia, China and Singapore accounted for 35%, 33% and 29% respectively.

Reiterate Buy

We maintain our BUY rating and keep our target price unchanged at RM1.22 (pegged to 21x FY21E EPS). We remain upbeat on KGB being a prime beneficiary of SMIC’s higher capex and its longer-term prospects as the group benefits from China’s structural change over the next 5 years to grow its semiconductor market. Downside risks: further delays in project progress leading to slower revenue recognition, cost overruns and lower LCO2 demand

Source: Affin Hwang Research - 26 Aug 2020