Kenanga Research & Investment

Kelington Group - Defying Gravity

Publish date: Thu, 29 Feb 2024, 11:02 AM

KGB’s FY23 results beat expectations on robust project deliveries across all markets. It is poised for further margin expansion as it rides the next semiconductor uptrend. We raise our FY24F net profit forecast by 4%, lift our TP by 4% to RM3.40 (from RM3.28) and reiterate our OUTPERFORM call. KGB remains one of our tech- related top picks.

KGB’s FY23 net profit of RM102.7m (+26% YoY) beat our forecast and the market consensus by 14% and 15%, respectively. The variance against our forecast came largely from better-than-expected project billings in Singapore.

YoY, KGB’s FY23 revenue rose 26.2% on the back of robust project deliveries across all the operating markets. Geographically, revenue recognition from Malaysia (c.43% of group revenue) grew 22% while Singapore (c.35% of group revenue) trended 27.8% higher. In spite of China’s general economy facing a sluggish recovery, KGB still managed to record a commendable 33% growth in its China operation, showcasing the group's adept business management capabilities. As such, FY23 net profit leapt 84.1% on the back of a favourable revenue mix which boosted its net profit margin by 2ppts to 6.4%.

QoQ, in line with its seasonal upcycle, its 4QFY23 net profit climbed 12.8% on a 19% increase in revenue, thanks to stronger-than-expected billings from its Singapore operation (+55%).

Poised for the next semiconductor upcycle. With the lower-margin turnkey job in Sarawak now behind it, the group has witnessed a rebound in its net profit margin over the past two quarters with more room for improvement. This positive trend is driven by a substantial increase in higher- margin UHP jobs, representing c.74% of its outstanding orders (vs. c.60% in FY23). In FY23, the group secured RM1.1b worth of new jobs and we are conservatively expecting the group to repeat its RM1b replenishment in FY24. With China’s recovery gradually taking shape coupled with the gradual uptick in the semiconductor industry, we believe KGB is poised for the next upcycle. Irrespective of the pace of the recovery in the semiconductor sector, the group has RM1.3b outstanding orders in its bag to drive its earnings.

Forecasts. We raise our FY24F net profit forecast by 4% and introduce our FY25F numbers.

Valuations. Correspondingly, we lift our TP by 4% to RM3.40 (from RM3.28) 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).

Investment case. 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 - 29 Feb 2024

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