Kenanga Research & Investment

Kelington Group - LCO2 Plant Hits 100% Run Rate

Publish date: Wed, 08 Mar 2023, 09:24 AM

In order to meet overwhelming demand for its LCO2 gas, KGB is doubling its capacity with a second plant (which will come online in 4QFY23). The new capacity will contribute to a c.60% YoY revenue growth in its industrial gas business. Meanwhile, its bread-and-butter contacting services are also poised for a solid performance in FY23 backed by a sizeable RM1.7b order book (and a tender book of RM2b). We maintain our forecasts, TP of RM1.92 and OUTPERFORM call.

The key takeaways from KGB’s 4Q22 briefing yesterday are as follows:

1. KGB’s liquid carbon dioxide (LCO2) plant in Kerteh, Terengganu was operating at 80% in FY22 and has recently maxed out its capacity of 50k tonnes/year. To cater for growing demand from the F&B industries in the Oceania region, KGB has started building its second LCO2 plant (RM45m capex with capacity of 70k tonnes/year) which would more than double its capacity. The second LCO2 plant will be situated beside its existing plant in Kerteh and is slated to commence operation by 4QFY23.

2. The group indicated that the 10-year on-site gas supply (of hydrogen, nitrogen, and oxygen) for an optoelectronic MNC in Kulim will be slightly delayed to 4QFY23. Nonetheless, recognition of revenue will begin in 3QFY23 as per the contractual agreement. This is expected to contribute positively to the group’s effort in growing its recurring revenue stream. As such, KGB is anticipating its industrial gas business segment to achieve the RM100m revenue mark in FY23 which translates into a c.60% YoY growth.

3. Despite the cautious sentiment surrounding the semiconductor space, the group reiterated that it is confident of delivering another solid performance in FY23 owing to its large outstanding order book of RM1.71b as at Dec 2022. The group had since secured another RM170m job award in Jan 2023 with the expectation of achieving RM1b job replenishment in FY23. This is supported by its tender book which has ballooned to RM2b with China making up c.46%, followed by c.36% and c.18% from Singapore and Malaysia respectively.

Forecasts. Maintained

We also keep our TP of RM1.92 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).

Investment thesis. We like KGB for: (i) it being a direct proxy to the frontend 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.

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 its LCO2 plant expansion.

Source: Kenanga Research - 8 Mar 2023

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