KGB’s 9MFY22 results exceeded expectations. Its revenue more than doubled on higher project deliveries in Malaysia (+239% YoY) and Singapore (+158% YoY). It also saw strong revenue growth (+37% YoY) in China despite the intermittent lockdowns. The group anticipates a strong quarter ahead as it moves into its seasonally stronger period. We raise our FY22F and 23F earnings by 10% and 7%, respectively, increase our TP by 3% to RM1.80 (from RM1.75) and maintain our OUTPERFORM call.

Above expectations. KGB’s 9MFY22 earnings of RM37.6m (+80% YoY) came in at 75% and 78% of our full-year forecast and the full-year consensus estimates, respectively. However, we deem the results above expectations as we expect bumper earnings in 4Q.

Results’ highlights. YoY, 9MFY22 revenue soared 152.4% on higher demand for the group’s services amidst the aggressive expansion among front-end semiconductor players. Geographically, Malaysia being the largest revenue contributor saw a gain of 239%, followed by Singapore with a revenue increase of 158%. More importantly, revenue from China climbed 37% despite the on-going lockdowns, further reinforcing KGB’s resilience and timeliness in project deliveries. Overall, 9MFY22 net profit jumped 80% to RM37.6m.

Charting another record year. The group expects the positive momentum to continue into 4QFY22 as it enters its seasonally strongest quarter. We gather that its liquid carbon dioxide (LCO2) plant has been consistently exceeding 80% utilisation rate on greater demand from customers. To cater for further increase in orders, the group is building a second plant which will commence operation in FY24. As of 30 September 2022, the group has secured RM1.4b worth of new jobs (excluding two new contracts won in November worth RM262m), bringing its outstanding orderbook to RM1.6b.

Forecasts. We raise our FY22F and 23F net profits by 10% and 7%, respectively.

We like KGB for: (i) it being a direct proxy to the front-end wafer fab expansion, (ii) its strong earnings visibility underpinned by robust order-book and tender-book exceeding RM1b, and (iii) its strong foothold in multiple markets, i.e. Malaysia, Singapore and China.

Maintain OUTPERFORM with a higher TP of RM1.80 (previously RM1.75) based on 22x FY23F PER, which represents a slight reduction from 23x previously to reflect the downtrend in the sector’s forward PER. The sector’s forward PER is the average of regional peers, i.e. PNC Process Systems and Linde. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Risks to our call include: (i) chip makers halting their expansion plans due to oversupply, (ii) operations in China impacted by lockdowns, and (iii) delays in LCO2 expansion.

Source: Kenanga Research - 21 Nov 2022