Kenanga Research & Investment

Kelington Group - Charging Ahead at Full Speed

Publish date: Fri, 09 Dec 2022, 08:58 AM

KGB has made good progress on its projects across different geographical markets, paving the way for another strong quarter ahead. Its order book now stands at RM1.6b with 74% coming from the ultra-high purity gas segment that will underpin margin expansion in FY23. More so, its low-margin job in Sarawak is completing by 1QFY23. We maintain our forecasts, TP of RM1.80 and OUTPERFORM call.

We came away from KGB’s analyst briefing yesterday feeling reassured of its near-term prospects. The key takeaways are as follows:

1. It is upbeat on the coming quarter thanks to strong progress billings across all three geographical areas (i.e. Malaysia, Singapore and China) it operates in. The group remains confident that its China operation (9MFY22 revenue +37% YoY) will continue to do well as it is less susceptible to the supply-chain disruptions (such as the shortage of components) from the lockdowns, given the relatively simpler nature of its work process.

2. As at end-3QFY22, its outstanding order book stood at RM1.6b consisting of 74% ultra-high purity (UHP) gas systems, 22% general contracting and 4% process engineering. Having a lion’s share of outstanding orders coming from the UHP segment means it will see margin expansion going into FY23. More so, it will be completing, by 1QFY23, a low-margin turnkey job in Sarawak (largely general contracting). KGB remains aggressive in bidding for new projects with its tender book staying elevated at RM1.7b. It is keeping a close eye on the expansion plans of semiconductor wafer fab in China and Singapore.

3. In terms of sustainability, KGB has been able to maintain zero accidents among its employees despite a significant increase in jobs. In addition, the group continues to exhibit YoY reduction in its CO2 emission (-46%), electricity usage (-23%) and water usage (-23%). As a result of effective oversight on ESG practices, the group was recently awarded as the “most improved company over three years” by The Edge ESG Awards 2022.

Forecasts. Maintained.

Investment thesis. 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.

Maintain our OUTPERFORM call with an unchanged target price of RM1.80 on FY23F PER of 22x (in line with its peers’ forward average). 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) 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 - 9 Dec 2022

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