Pfizer’s Covid-19 vaccine announcement came as positive news for KGB. We believe KGB’s dry ice plant could see a rise in demand as pharmaceutical companies are reportedly snapping up dry ice to store vaccines. More importantly, the availability of vaccine paves the way for a full economy re-opening, which facilitates KGB’s UHP installation works. The stock now only trades at 16.7x Fwd. PER vs peers’ average of 30-58x. Reiterate OUTPERFORM and TP of RM1.92.

Dry ice critical for Covid-19 vaccine. As reported by Bloomberg, Pfizer's Covid-19 vaccine proves to be 90% effective. Interestingly, we understand that the vaccine needs to be packed with dry ice to keep temperatures below -70°C in order to maintain its optimal efficacy. Because of this, according to NBC News, dry ice is experiencing a rise in demand from pharmaceutical companies working on vaccine as well as increased usage for food delivery service. Coincidentally, Kelington Group Bhd (KGB) has a dry ice plant located in Shah Alam, positioning them well to benefit from this demand surge.

A re-opening play. More importantly, the availability of vaccine paves the way for a full economy re-opening, which facilitates KGB’s UHP installation works. Currently, KGB’s outstanding orderbook has piled up to a record high of RM386m (vs. RM258m at end-FY19). This means that, as the economy reopens, there is a huge backlog of jobs for KGB to deliver. In fact, KGB has already been resuming operations in Malaysia, Taiwan and China, while Singapore operations are back to 75% (from 30% earlier).

All stars aligned. We believe KGB is poised for a strong earnings recovery in FY21, backed by record-high orderbook, imminent wafer shortages (thus requiring further expansions) and China’s semiconductor localisation efforts. Besides, with Biden winning the US election, we believe sentiment overhang on SMIC and hence KGB is now cleared.

Maintain FY20E and FY21E earnings. We believe KGB’s earnings potential in FY21 is being underestimated by market, which is only looking at RM17.9m. To put things into perspective, KGB already achieved PAT of RM24.4m in FY19 even with ~RM1m start-up losses for its liquid CO2 plant and ~RM2m idling losses at Taiwan division. For FY21, we forecast the liquid CO2 plant to start generating RM3-4m profit, while Taiwan also swings into profit of RM2m. With its all-time high orderbook, we believe we too are still being conservative with our FY21E PAT of RM26.0m (+230% YoY).

Maintain OUTPERFORM and Target Price of RM1.92, based on FY21E PER of 23.6x (+0.5SD from 3-year mean – a premium justly applied on our conservative FY21 estimate). The stock currently trades at FY21E PER of 16.7x, significantly cheaper than peers’ average of 30-58x.

Risks to our call include: (i) Slower-than-expected revenue recognition due to Covid-19, (ii) downturn in semiconductor sales, and (iii) delay in liquid CO2 ramp up.

Source: Kenanga Research - 11 Nov 2020