Kenanga Research & Investment

Kelington Group - Rock Solid

Publish date: Thu, 01 Jun 2023, 09:51 AM

KGB guided for better performance in subsequent quarters, premised on its RM1.93b job pipeline and efficient cost control. Its second liquid CO2 (LCO2) plant is expected to be commissioned by Oct 2023. It will capture business opportunities the existing plant 1— already operating at close to full capacity—was unable to seize. We maintain our forecasts, TP of RM1.92 and OUTPERFORM call.

We came away from KGB’s post-1QFY23 briefing feeling upbeat on the group’s outlook. Key takeaways from the meeting are as follow:

1. Coming off its seasonally weaker 1QFY23 which still recorded a doubling of net profit YoY, the group is excited for the subsequent quarters where it envisions performance to trend in an upward trajectory towards the end of the year. This is supported by its robust project pipelines coupled with efficient cost control, as evidenced in its 1QFY23 performance where administrative expenses only inched up 25% YoY relative to its revenue growth of 78% YoY.

2. The fabrication works for its second LCO2 plant (with capacity of 70k tonnes/year) at an investment of RM45m are currently on-going with commissioning expected by Oct 2023. It will capture business opportunities its existing plant 1 (capable of producing 50k tonnes/year) was unable to seize as it is currently already running at 91% utilisation rate, driven by overwhelming orders from the F&B industry in Asia and the Oceania region.

3. Despite the general slowdown in the semiconductor sector, which was reflected in the group’s tender book moderating from RM2b to RM1.4b, we believe this figure is still a very large sum with an abundance of job tenders in the space still. Also, not forgetting the group is sitting on a sizable outstanding order book of RM1.93b which will provide solid earnings visibility compared to many other tech players which are struggling with order cuts amidst the challenging climate.

Forecasts. Maintained.

We also keep our TP of RM1.92 based on an unchanged 22x FY23F PER, in line with its peers’ 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 foothold 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 - 1 Jun 2023

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