KGB's outlook remains promising, supported by a robust order book primarily consisting of high-margin UHP projects. Its LCO₂ plants are operating at 58% capacity, with utilization expected to increase due to strong regional demand. We have adjusted our FY24-25 net profit forecasts upward by 4%/2% and raised our target price to RM4.16, maintaining our OUTPERFORM call.

We recently met with KGB's management and remain optimistic about its promising outlook. The key takeaways from the meeting are as follows:

1. KGB is well-positioned to benefit from the anticipated recovery in semiconductor demand in 2024 and beyond. The Semiconductor Industry Association (SEMI) expects 103 new fabs worldwide to come online between 2023 and 2027, including eight in Southeast Asia, driven by production capacity expansions to support AI proliferation and other disruptive technologies. As a reputable infrastructure contractor, KGB is set to be a key beneficiary in the region.

2. Recently, the group secured additional ultra-high purity (UHP) gas contracts worth RM413m, mostly from Malaysia and Singapore, bringing its YTD secured contract value to RM977m as of early September. KGB continues to see a higher proportion of UHP gas solution jobs in its pipeline, making up c.76% (versus 74% in FY23) of its RM1.29b outstanding order book as of the end of 1HFY24. Its tender book remains significant at RM1.66b, predominantly potential jobs from Singapore, China, Germany and Hong Kong.

3. Its LCO2 plants, with a combined capacity of 120k MT (Plant 1: 50k MT; Plant 2: 70k MT), are now operating at c.58% capacity—up from about 40% in 1QFY24—producing 200 tonnes per day. The utilization rate is expected to rise due to strong uptake from Plant 2, driven by increased demand from neighbouring countries experiencing permanent LCO2 shortages following plant shutdowns for decarbonization efforts. Besides, its 10-year contract to supply hydrogen, nitrogen, and oxygen to an optoelectronics semiconductor giant in Kulim, Kedah, has began contributing in 2QFY24 and will continue until 2QFY34. The group has earlier guided for cumulative revenue of approximately RM180m over the period, generated through fixed facility fees and gas sales.

Forecasts. Raised our FY24/FY25F net profit by 4%/2%, respectively, after incorporating the latest quarterly results and increasing our FY24 new orders assumptions by RM200m to RM1.2b.

Valuations. Correspondingly, we have raised our TP to RM4.16 (vs. RM4.10 previously) based on an unchanged 21x FY25F 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 foothold 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 - 19 Sep 2024