KGB’s 1QFY24 results met expectations. Its 1QFY24 net profit jumped 54% buoyed by high-margin UHP projects and maiden contribution from its second LCO2 plant. We foresee significant job wins in 2HCY24. We keep our forecasts but raise our TP by 21% to RM4.10 (from RM3.40) and reiterate our OUTPERFORM call. KGB remains one of our sector top picks.

KGB’s 1QFY24 net profit of RM24.9m (+54% YoY) accounted for 24% of our full-year forecast and 21% of market consensus. We deem the results within expectation as 1Q is KGB’s seasonally weakest quarter.

YoY, KGB’s 1QFY24 revenue rose 9.8% on the back of robust project deliveries across all the operating markets. Geographically, revenue recognition from Malaysia (c.45% of group revenue) grew 6.4% while China (c.31% of group revenue) trended 128% higher as momentum picked up among China’s wafer fab expansion. This helped to offset weaker showing from its Singapore operation (c.21% of group revenue) which fell 32%. Its net profit jumped by a sharper 54% due to: (i) higher proportion of UHP jobs delivered, and (ii) greater contribution from its industrial gas (yielding twice higher GP margins compared to other segments) as its second LCO2 plant came online, leading to higher net profit margin of 7.3% (vs. 5.2% in 1QFY23)

QoQ, its 1QFY24 revenue fell 29% while net profit shrank 30% as 1Q is seasonally its weakest quarter. It is worth noting that the top line of its industrial gas segment rose 17% due to the commencement of its second LCO2 plant which enjoyed a healthy take up rate.

Outlook. We expect sustained strong performance from KGB underpinned by substantial increase in higher-margin UHP jobs, representing >70% of its outstanding orders (vs. c.60% in FY23). The group has secured RM235m jobs up to 31 Mar 2024, bringing its total outstanding order book to RM1.25b. We are sanguine that the group will be able to secure at least RM1b worth of higher-margin orders in FY24 (vs. RM1.1b in FY23) backed by: (i) more wafer fab expansion in Singapore slated to take place from 3Q onwards, and (ii) China’s ambitious plans to increase its semiconductor fabs by 60% in three years for domestic consumption and double the capacity in five years, according to TendForce.

Forecasts. Maintained

Valuations. We lift our TP by 21% to RM4.10 (from RM3.40) based on an unchanged 21x PER pegged to a rolled-forward earnings base of FY25F (from FY24F). 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) a slowdown in wafer fab investment, (ii) worsening Sino-US chip war, and (iii) low utilisation of its LCO2 plants.

Source: Kenanga Research - 24 May 2024