• KGB’s operations would be minimally impacted by the recent implementation of the 14-day MCO by the Malaysia government. Upside seen in better utilisation of its LCO2 plant from higher Singapore demand
• KGB also announced that it had secured RM118m worth of contracts, with SMIC making up c.RM40m. SMIC tender for 2021 has finally opened
• We upgrade the stock to a Buy with a higher TP of RM2.40 as it is riding on a strong tech upcycle and trading below the sector average PER for 2021E, with an expected record EPS growth of 79%

Impact on Malaysia Operation With Recent Re-implementation of MCO

The Malaysia government has re-implemented the Movement Control Order (MCO) and Conditional MCO in most states from 13–26 Jan 2021 to curb rising COVID cases. With cases still on the high side, this could be extended beyond a month as the Health DG mentioned that it might take four to five weeks to flatten the curve. All of KGB’s 17 sites are still allowed to operate under MITI approval, but efficiency is slightly affected due to SOP compliance.

SMIC Tender Finally Open

After much delay, SMIC (which accounts for c.30% of order book as of end 3Q20) has opened the tender to shortlist the contractor for its 2021 work. The bidding results are expected to be known by early March 2021. The tender for 2021 is for 4 fabs worth a total estimated value of RMB100m (RM60-65m).

LCO2 Plant Seeing Some Uptick

While there are concerns surrounding its LCO2 plant utilisation, which hit an all-time low of 14% in 2Q20 during the previous MCO, the impact of the current MCO is not expected to be as severe since the manufacturing and construction industries are permitted to operate. Malaysia demand saw a decline lately, but this was cushioned by a short-term spike in Singapore activities. The LCO2 plant is currently operating at 60-70% (pre-MCO: 50%), taking into account the current storage limitations.

Upgrade to Buy From Hold With a Higher TP of RM2.40

We revised our 2021-22 EPS forecasts higher by 18-30% to factor in the higher order book replenishment. We raised our 12-month target price to RM2.40, based on a higher 2021E PE of 28x (+1.5SD its 5-year mean; previously 25x) to reflect the stronger earnings outlook. Riding on a strong tech upcycle and trading at a 2021E PER of 23x, still below the sector average, KGB looks attractive and warrants an upgrade to Buy.

Source: Affin Hwang Research - 20 Jan 2021