Kenanga Research & Investment

Kelington Group - Propelled by Strong Project Deliveries

Publish date: Tue, 28 Feb 2023, 10:22 AM

KGB’s FY22 results exceeded expectations. Core net profit grew 74% driven by the ultra-high purity (UHP) segment on strong demand from Singapore-based wafer fabs, and its general contracting segment was significantly boosted by a turnkey project in Kuching. An order book of RM1.7b will keep it busy over the next 20 months. Hence, we raise our FY23F earnings by 7%, TP also by 7% to RM1.92 (from RM1.80) and maintain our OUTPERFORM call.

Above expectations. KGB’s FY22 earnings of RM55.4m (+74% YoY) exceeded our forecast and consensus estimate by 10% and 6%, respectively. The variance against our forecast was attributable to fasterthan-expected progress for its key projects in 4QFY22.

Results’ highlights. YoY, FY22 revenue soared 145.2%, propelled by higher project deliveries across all its business segments as the group benefited from the rapid floor space expansion amongst semiconductor players. Its UHP segment grew 135% thanks to higher orders from wafer fabs in Singapore and China. Meanwhile, the general contracting segment’s revenue skyrocketed 355% owing to the turnkey project it undertook in Kuching for a memory chip company.

Armed with a strong order book. In spite of the general slowdown in the tech space, we are sanguine on KGB’s earning resilience owing to its large order book. For FY22, the group has secured RM1.85b worth of new jobs while its outstanding order book stood at RM1.7b as at 31 December 2022. We are also anticipating a replenishment of another c.RM1b in FY23 which will keep the group busy well into FY24. In addition, the group is building a second liquid carbon dioxide (LCO2) plant which will commence operation in FY24. This will allow the group to cater for growing demand from the F&B sector.

Forecasts. We raise our FY23F net profit by 7% and introduce our FY24 numbers.

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 footholds in multiple markets, i.e. Malaysia, Singapore and China.

Maintain OUTPERFORM with a higher TP of RM1.92 (previously RM1.80) based on an unchanged 22x FY23F PER, in line with peer’s forward average. 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) worsening Sino-US chip war, and (iii) delays in LCO2 expansion.

Source: Kenanga Research - 28 Feb 2023

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