KGB is well-positioned for growth, buoyed by high-margin UHP projects making up the majority of its RM1.45b order book, and a rising tender book supported by a strategic partnership for the market in Germany. In industrial gases, strong liquid CO2 demand drives growth, with capacity expansion planned as utilisation nears 90% within 3-4 years. The addition of an industrial gas subsidiary and potential carbon capture partnerships enhance further growth potential. Hence, we have raised our FY24 and FY25 net profit forecasts by 8% and 15%, respectively, but maintain our TP at RM4.16, based on a 21x FY25 PER on an enlarged share capital, assuming a progressive 25m warrant conversion per quarter.
We came away from KGB's post-3QFY24 briefing reassured of its promising outlook. The key takeaways from the meeting are as follow:
Forecasts. We raised our FY24F/FY25F net profit by 8%/15%, respectively, driven by higher GP margin assumptions of 19% (vs. 16.5% previously) and increase FY25 new orders expectations by RM300m to RM1.6b.
Valuations. We have factored the 174m outstanding convertible warrants (expires on 24 July 2026 with an exercise price of RM1.38) progressively into our share base calculations, expecting investors to convert the warrants to benefit from KGB's long-term growth prospects rather than short-term trading. The enlarged share based resulted in our TP being maintained at RM4.16 based on an unchanged 21x FY25 PER. 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 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 - 14 Nov 2024
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