Kenanga Research & Investment

Kelington Group - Work Progress Gains Momentum in China

Publish date: Mon, 21 Aug 2023, 10:08 AM

KGB’s 1HFY23 results beat expectations on stronger-than-expected billings in China post economy reopening. Meanwhile, its ultra-high purity (UHP) gas delivery solution segment bucked the slowdown in the semiconductor industry while its LCO2 plant operated at peak capacity. We raise our FY23-24F net profit forecasts by 11% and 13%, respectively, lift our TP by 12% to RM2.15 (from RM1.92) and reiterate our OUTPERFORM call.

Above expectations. KGB’s 1HFY23 results exceeded our expectation, delivering net profit of RM35.3m (+61% YoY) which accounted for 63% and 56% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from stronger-than-expected billings from China.

Results’ highlights. YoY, 1HFY23 revenue exhibited a substantial 51% growth, driven by successful project deliveries across all operating markets. Notably, Malaysia (which contributes half of the group’s revenue) recorded a 37% growth, while Singapore followed suit with a meaningful growth of 61%. More importantly, China's revenue saw a notable upswing of 57%, attributed to improved recognition from project completions in 2QFY23 which experienced an impressive rise (+72% QoQ). Zooming into segmental breakdown, its UHP gas delivery solutions (c.60% of group revenue) recorded a 56% expansion on the back of robust revenue recognition from the semiconductor sector. Furthermore, its industrial gases segment, which yields a lucrative gross profit margin of c.30% saw demand skyrocketing by 146% due to overwhelming demand from the F&B industry. As such, the group’s LCO2 (liquid carbon dioxide) plant is currently running at close to 100% capacity.

Strong visibility ahead. In the face of a slowdown in the technology sector, KGB has demonstrated resilience and outstanding capacity in maintaining a steady stream of successful tenders with YTD job wins amounting to RM744m. With China reopening gradually taking place, we anticipate the group to be firing on all cylinders as it moves into 2HFY23. In addition, KGB is currently on track to complete its second LCO2 plant by October and commence operations by November where it will allow the group to accommodate the influx of demand from neighbouring countries.

Forecasts. We raise our FY23-24F net profit forecasts by 11% and 13%, respectively, largely to reflect the stronger billings in China and a higher FY23 order replenishment target of RM1.1b (from RM1b previously).

Consequently, we raise our TP by 12% to RM2.15 (from RM1.92) based on a 21x rolled-forward FY24F PER, in line with peer’s forward average. The sector’s forward PER is the average of regional peers, namely PNC Process Systems, Air Liquide 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.

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.

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 - 21 Aug 2023

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