Kenanga Research & Investment

Kelington Group - Christmas Came Early

Publish date: Fri, 24 Nov 2023, 09:32 AM

KGB’s 9MFY23 results beat expectations on margin expansion stemming from account finalisation of a turnkey job and accelerated billings from high-margin ultra-high purity gas system projects. We raise our FY23-24F net profit forecasts by 45% and 53%, respectively, lift our TP by 53% to RM3.28 (from RM2.15) and reiterate our OUTPERFORM call.

Above expectations. KGB’s 9MFY23 net profit of RM66.9m (+78% YoY) already surpassed our full-year forecast by 7% and was only 1% away from the full-year consensus estimate. The variance against our forecast came largely from stronger-than-expected billings from its projects in China.

Results’ highlights. YoY, its 9MFY23 revenue recorded a 33.3% jump on the back of robust project deliveries across all the operating markets. Geographically, Malaysia (which accounts for 43% of group revenue) saw higher revenue by 23% while Singapore (c.35% of group revenue) grew 38%. Despite China undergoing a gradual recovery, KGB achieved a remarkable 45% growth in its Chinese operations, showcasing the group's adept business management capabilities. As such, 9MFY23 net profit leapt 78.1%, driven by significant margin expansion from favourable revenue mix.

QoQ, its 3QFY23 further illustrates the enhancement of net profit margin to 7.9% (from 4.5% in 2QFY23) as it concluded the lower margin turnkey job and focused more on ultra-high purity gas system's projects which commands better margin.

Strong momentum to continue into 4Q. With a favourable revenue mix, the group is poised for another robust quarter ahead, aligning with its seasonal trend. As at 3QFY24, the group has secured RM858m worth of new jobs and is on track to achieve our RM1b estimated replenishment target. With China reopening gradually taking place coupled with the consensus that the semiconductor industry has largely bottomed, we believe KGB is well prepared for another upcycle. Be it a smooth or bumpy recovery for the semiconductor sector, the group still has RM1.5b outstanding orders in its bag to navigate any obstacles that may come along, further solidifying its preparedness for the future.

Forecasts. We raise our FY23-24F net profit forecasts by 45% and 53%, respectively, as we reflect stronger project deliveries and margin expansion on improved revenue mix.

Consequently, we lift our TP by 53% to RM3.28 (from RM2.15) based on an unchanged 21x FY24F PER. Our valuation represents a c.10% discount to peer’s forward mean PER of 24x which includes global players such as Air Products, 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).

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.

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 - 24 Nov 2023

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