KGB's 9MFY24 results were above our expectation, thanks to stronger-than-expected margin expansion as a result of favourable segmental mix. With RM1.45b in order book, KGB is well-positioned for continued growth, supported by UHP's expansion and new fab projects in China. We are maintaining our forecast for now (but with upward revision bias), pending updates from the upcoming briefing.

Target price remains at RM4.16 with an unchanged OUTPERFORM rating.

Considering expectation of a stronger 4QFY24, KGB's 9MFY24 net profit of RM84m (+26% YoY) is deemed as having exceeded our estimate but aligned with the street's projection, achieving 78% of our full-year forecast and 72% of the market consensus. This positive variance was largely driven by higher-than-expected margins, which we believe is mainly driven by its higher-margin Ultra High Purity (UHP) segment.

YoY, KGB's 9MFY24 revenue declined by 15%, primarily due to lower UHP contributions from Singapore and Malaysia as several major projects neared completion as well as lower-margin general contracting job contribution. However, this was partially offset by robust sales in China, fuelled by ongoing wafer fab expansions. Despite the revenue dip, GP increased by 25% YoY, with margins expanding by nearly 6ppts to 18.4%, thanks to a favourable segmental mix. The high-margin UHP segment now represents approximately 67% of group revenue for 9MFY24, up from 63% a year ago, and likely has surpassed the previously guided margin of 15%, contributing to the overall margin improvement and strong growth in net profit to RM84m.

QoQ, its 3QFY24 revenue declined by 4%, but net profit rose by 23% to RM33m, driven by an impressive GP margin expansion. Notably, the group's GP margin exceeded the 20% threshold, which we attribute to the strong performance of its UHP division. Its industrial gases division showcased steady improvement with 17% jump in turnover, driven by consistent demand for liquid carbon dioxide in both local and export markets. Its other expenses jumped to RM9.7m (vs. RM3m in 2Q), which we believe was mainly owing to unrealised forex losses and could be reversed in the 4Q if the MYR/USD exchange rate normalised.

Outlook. KGB is poised for continued robust performance, bolstered by a significant increase in higher-margin UHP projects, which now constitute about 70% of its sales in 3QFY24, up from 63% in FY23. As of September 30, 2024, the group has secured RM1b in new contracts, elevating its total outstanding order book to RM1.45b (vs. RM1.29 in 2Q). We are targeting KGB to secure RM1.2b in new orders for FY24, surpassing the RM1.1b achieved in FY23. This confidence is underpinned by the rapid expansion of new fabrication facilities, particularly in China. Notably, the latest SEMI World Fab Forecast anticipates 103 new fabs coming online between 2023 and 2027, indicating a strong pipeline of opportunities.

Forecasts. Maintained but with upward revision bias, pending today's briefing.

Valuations. We maintained our TP at RM4.16 based on an unchanged 21x PER FY25F. Our valuation represents a 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) 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 - 13 Nov 2024