KGB’s post-results’ briefing received positive response from ~80 participants. KGB’s order-book reached a new high of RM370m as SMIC’s expansion hit full speed, with no signs of slowing. Job replenishment remains healthy. The group expects order-book level to remain elevated even after factoring a stronger 4Q ahead. In addition, KGB has been in touch with Pfizer to understand the use of dry ice to store vaccines. We believe the scarcity of deep freezer, especially in rural areas, makes dry ice a timelier and more efficient option for vaccine distribution. Positive prospects are juxtaposed with an attractive Fwd. PER of 18.7x vs peers’ average of 30-58x. Our OUTPERFORM call and TP of RM2.30 reaffirmed.

QoQ growth in 4Q. The post-results’ conference call with management received positive response from ~80 participants. The conference call reasserts our OUTPERFORM call, with a target price of RM2.30. With the current order visibility at hand, the group is on track to record another strong QoQ growth in the upcoming 4Q.

Order-book hits new high, again. SMIC is showing no signs of slowing down and indicated more UHP-related job awards as current utilisation is filled to the brim. As a result, KGB’s order-book has hit a new high of RM370m as at 30 Sep, thanks to strong replenishment of RM142m new orders from SMIC, Micron and Lam Research. The group expects order- book level to remain elevated even after factoring in a better 4Q. KGB is currently tendering for RM900m worth of jobs, spread equally across Malaysia, Singapore and China. Being regarded as a preferred vendor among large MNCs, the group is in a favourable position to benefit from various on-going expansions by WD Penang (announced RM2.3b investment), Micron SG (new fab construction), along with Lam Research, Bosch, and B Braun.

Dry ice is heating up. Government has reportedly signed a deal with Pfizer for 12.8m doses of Covid-19 vaccines to immunise 20% of the Malaysian population. Subsequently, KGB has been in touch with Pfizer and other pharma companies to understand the requirements of using dry ice to store the vaccines. We understand that the scarcity of medical deep freezer, especially in rural areas makes dry ice a timelier option for shipping and distribution. Apart from supplying their own dry ice, other dry ice manufacturer in Malaysia also have to source liquid CO2 from KGB, as there are only two players locally, due to high barrier of entry.

Maintain FY20E and FY21E earnings. We believe KGB’s earnings potential in FY21 is being underestimated by market, which is only looking at RM22.2m. KGB already achieved PAT of RM24.4m in FY19 even with ~RM1m start-up losses for its LCO2 plant and ~RM2m idling losses at its Taiwan division. For FY21, we forecast the LCO2 plant to start generating RM3-4m profit, while Taiwan will also swing into profit of RM2m. With its all- time high order-book, we believe our FY21E PAT of RM31.1m is fair, representing merely a 27% growth from FY19 level.

Maintain OUTPERFORM and Target Price of RM2.30, based on FY21E PER of 23.6x (+0.5SD from 3-year mean).

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

Source: Kenanga Research - 2 Dec 2020