We are highly positive on KGB’s plan to expand its recurring income stream by building a second liquid carbon dioxide (LCO2) plant in Kerteh, Terengganu, with a capex of RM45m. The new investment will enable KGB to meet greater LCO2 demand as customers are knocking on its doors for additional supply given the group’s proven record in delivery and product quality. The new plant is targeted for commissioning by Dec 2023 with its maiden contribution expected to kick in by FY24 (which is beyond our forecast period). We maintain our forecasts, TP of RM1.75 and OUTPERFORM call.

1. KGB has announced its plan to build a second liquid carbon dioxide (LCO2) plant in Kerteh, Terengganu with a capex of RM45m. The reason for the expansion is to capture more demand as its existing LCO2 plant 1 has been running at c.90% utilisation, above its target of 80% for 2022. In fact, LCO2 plant 1 has been exceeding the group’s target utilisation rate since its commissioning in 2019 and growing resiliently despite the pandemic. The investment will raise its net debt and net gearing of RM47m and 0.22x as at end-2QFY22 to RM80m and 0.35x, respectively, which are still highly manageable.

2. We learnt that customers are knocking on its doors for more LCO2 supply as the group has been able to deliver consistently without disruptions (unlike its peers). While the group only made its foray into this business three years ago, it has already demonstrated its competency and gained the trust of customers to be the second reliable source for LCO2. The customers are mainly MNCs in the food and beverage industry.

3. The new plant is expected to start construction in December 2022, and to be completed in December 2023. Any meaningful contribution will only come in by FY24. We are highly positive on this expansion as the LCO2 business (c.7% of group revenue) is of a recurring nature and yields lucrative margins of 30% at the gross level (which is double that of its other existing business segments).

Forecasts. Maintained

Maintain our OUTPERFORM call with an unchanged target price of RM1.75 on FY23F PER of 23x (in line with peers’ forward average). We continue to like KGB for its: (i) unique proxy position 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 entry barriers 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 on-going Covid-19 lockdowns in China, (ii) further cut in semiconductor capex, and (iii) delays in liquid CO2 ramp up.

Source: Kenanga Research - 14 Nov 2022