KGB surprised the market with a huge non-turnkey job win worth RM330m from a German customer for a new wafer fabrication plant in Kulim. The job entails the supply of ultrahigh purity (UHP) gas delivery systems for both bulk gas and specialty gas. The new win brings KGB’s order replenishment to a new high of RM1.28b, surpassing our expectation. We raise FY23F CNP by 5%, leading to a higher TP of RM1.70 (from RM1.60). Maintain OUTPERFORM.

Another commendable win to reach a new replenishment record.

1. Bucking gloomy headlines of slowing chip demand, KGB continues to surprise the market by landing another huge job win worth RM330m for the supply of UHP gas delivery systems. The contract was awarded by a German semiconductor company that is planning a new wafer fabrication facility in Kulim, Kedah. Given that this is a new wafer fab, the award will be a base build job that includes both bulk gas and specialty gas systems, commencing immediately until Sep 2024.

2. We believe this is one of the group’s largest non-turnkey awards which typically yield better margins. We observed that although the size of UHP contracts awarded is growing, the manpower requirements do not increase linearly. This is attributable to the group’s effort in fabricating its proprietary gas equipment two year ago which is starting to garner customer’s favour, hence contributing to higher contract value with similar workforce size.

3. Including this RM330m job win, KGB has surpassed our replenishment forecast to mark a new record of RM1.28b (vs. FY21 of RM1.19b which includes a large turnkey project). We are pleasantly surprised by the achievement despite the absence of turnkey projects this year. The group’s current orderbook has now swelled to RM1.87b which will provide very solid earnings visibility for FY22 and FY23.

Forecasts. Raised FY23F earnings by 5% to factor in the higher-than-expected order replenishment.

Maintain our OUTPERFORM call with a higher target price of RM1.70 (previously RM1.60) on FY23F PER of 23x (in line with peers’ forward average). We continue to like KGB for its: (i) unique proxy to the front-end semiconductor space, (ii) strong track record which continues to attract large MNC customers, and (iii) venture into the industrial gas segment which has high barriers to entry and yields very lucrative margins. There is no adjustment to our TP based on a 3-star ESG rating as appraised by us (see Page 4).

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

Source: Kenanga Research - 6 Sept 2022