Kenanga Research & Investment

Kelington Group - 1QFY23 Earnings Almost Double YoY

Publish date: Mon, 22 May 2023, 10:13 AM

KGB’s 1QFY23 results met expectations. Its net profit almost doubled YoY on: (i) healthy project deliveries across all operating  regions, (ii) strong contributions from its ultra-high purity (UHP)  segment, and (iii) a 145% jump in sales for high-margin industrial  gases on robust demand from the F&B sector, maxing out  utilisation at its LCO2 plant. We maintain our forecasts, TP of  RM1.92 and OUTPERFORM call.

Within expectations. KGB’s 1QFY23 results were in line with our  expectation, delivering net profit of RM16.2m (+95% YoY) which  accounted for 29% and 27% of our full-year forecast and the full-year  consensus estimate, respectively.

Results’ highlights. YoY, 1QFY23 revenue jumped 78.2% on the back  of robust project deliveries across all operating markets. Malaysia, which  accounts for nearly half of the group’s revenue, saw an 82.9% growth,  followed by substantial contributions from Singapore (+67.2%) and China  (+68.9%). Delving into its business segments, its UHP gas delivery solutions remain the group’s anchor business (c.60% of group revenue)  and recorded a 63.1% growth owing to strong demand from the semiconductor industry. Furthermore, its industrial gases segment,  differentiated by its higher gross profit margin of c.30% compared to other segments at c.15%, has more than doubled in revenue and now constitute c.8% to the group’s revenue. This was mainly driven by  surging demand in the F&B industry which propelled the group’s liquid carbon dioxide (LCO2) plant to operate near peak capacity. As a result, 1QFY23 net profit almost doubled YoY.

Order flows remain buoyant. Against the backdrop of a slowdown in the technology sector, KGB has exhibited resilience and exceptional capabilities in sustaining a steady flow of job wins. The group has secured RM596m  worth of new jobs YTD, putting it on track to achieve RM1b replenishment for the year, supported by an elevated tender book of RM2b. Furthermore, we take comfort in the group’s earnings visibility stemming from its strong outstanding order book of RM1.8b which will keep the group busy into FY24.

Forecasts. Maintained.

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.

We 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, namely 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). 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 LCO2  expansion.

Source: Kenanga Research - 22 May 2023

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