• KGB proposed a 1-for-1 bonus issue of shares, and a 1-for-3 bonus issue of warrants to all shareholders, with the exercise expected to be completed by 3Q21
• The group also announced its diversification plan to include industrial gas business as its core business, expecting this segment to contribute at least 25% of group profits moving forward
• Reiterate Buy with an unchanged 12-month target price of RM2.30 (pegged to 27x PER multiple on FY21E EPS)

1-for-1 Bonus Issue

The proposed 1-for-1 bonus issue of shares will see an issuance of up to 322.6m new shares, enlarging the share base to 645.2m. The aim of the exercise is to further enhance the trading liquidity of KGB’s shares. Both corporate exercises (including the issuance of new warrants) are expected to be completed by 3Q21.

Building up its war chest via warrants to potentially acquire asset(s)

KGB will also be issuing 215.1m free warrants on the basis of 1 warrant for every 3 shares held. The warrant will have an expiry tenure of 5 years. The exercise price has not been determined, but based on an illustrative warrant exercise price of RM0.975, KGB is expected to raise gross proceeds of up to RM209.7m. The proceeds have been earmarked to partly finance potential assets acquisition for its industrial gas business division, working capital requirement uses and to repay bank borrowings, term loans and leases. We view this positively as the group is planning ahead to build up its war chest to expand more aggressively into the industrial gas business via asset acquisition, which is expected to raise the overall group profit margin and provide a steady recurring income stream.

Maintain BUY and RM2.30 Target Price

Together with the bonus and warrants announcement, KGB has also proposed to diversify its existing bread-and-butter businesses to include industrial gas. While only making up 6%/3% of 2020 revenue and PBT contribution, management believes that the contribution may be at least 25% of group net profit moving forward. We make no changes to our earnings forecasts. Reiterate our Buy rating and 12-month target price of RM2.30 based on 27x FY21E EPS.

Downside risks include: 1) lower customer orders; 2) potential foreign labor issue, 3) prolonged US-China trade stand-off, and 4) worsening global economic environment.

Source: Affin Hwang Research - 7 Apr 2021