Our con-call with KGB was well attended by ~70 participants. The group has been working with pharma companies since 2-3 months ago to understand using dry ice to store Covid-19 vaccines. KGB is also one of two suppliers locally for LCO2 (raw mat of dry ice). More importantly, SMIC is asking KGB to speed things up and hinted of more UHP-related jobs award due to an imminent wafer shortage (SMIC’s utilisation already at 100%). Lucrative job tenders in the pipeline includes WD, Micron, Tsinghua Unigroup, Lam Research, Bosch, and B Braun. The stock is still cheap at 19.9x Fwd. PER vs peers’ avg. of 30-58x. Reiterate OUTPERFORM and TP of RM1.92.

Significantly undervalued. We hosted a conference call with themanagement recently which was very well attended by ~70 participants. Theconference call reaffirms our OUTPERFORM call with a target price of RM1.92. Despite rallying 28% after our initiation report (09/11/2020), we thinkthe stock is still cheap at FY21E PER of 19.9x vs peers’ average of 30-58x.

Dry ice being the highlight. The group has been working withpharmaceutical companies since 2-3 months back to understand therequirements of using dry ice to store Covid-19 vaccines. Apart fromsupplying their own dry ice, other dry ice manufacturer in Malaysia alsohave to source liquid CO2 from KGB, as there are only two playerslocally (Linde and KGB) due to the high barrier of entry. LCO2business is very lucrative with GPM >30%, which more than doubletheir ultra-high purity (UHP) gas delivery system margins.

SMIC speeding up expansion. On the UHP side, SMIC is asking KGB tospeed things up and hinted of more job awards due to an imminent wafershortage. SMIC recently reported 123% YoY jump in profit on 33% increasein revenue for 3QCY20, marking a new high. SMIC’s current utilisation rate isat 100% and it is guiding momentum to remain strong going into 1H 2021.Tendering activities are getting much more intense with Western Digital(which announced RM2.3b investment in Penang), Micron Singapore(resuming memory spending), along with Tsinghua Unigroup, LamResearch, Bosch, and B Braun looking to expand capacity. Note that KGBhas worked with Western Digital and Micron Singapore in all their pastexpansions, positioning the group well for upcoming tenders.

Maintain FY20E and FY21E earnings. We believe KGB’s earningspotential in FY21 is being underestimated by market, which is only looking atRM17.9m. KGB already achieved PAT of RM24.4m in FY19 even with~RM1m start-up losses for its LCO2 plant and ~RM2m idling losses atTaiwan division. For FY21, we forecast the LCO2 plant to start generatingRM3-4m profit, while Taiwan also swings into profit of RM2m. With its all-time high orderbook, we believe we too are still being conservative with ourFY21E PAT of RM26.0m (+230% YoY). We anticipate the upcoming3QFY20 results to meet our expectation.

Maintain OUTPERFORM and Target Price of RM1.92, based on FY21EPER of 23.6x (+0.5SD from 3-year mean – a premium justly applied on ourconservative FY21 estimate).

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 - 16 Nov 2020