• Keep BUY, higher MYR1.71 TP from MYR1.69, 26% upside and c.1% yield. We raise our forecasts on incrementally higher orderbook replenishment assumptions and after baking in the new 10-year on-site gas supply contract. Our target P/E is lowered to 25x from 28x, reflecting a more cautious sector sentiment. This is still at +1SD of historical mean, as Kelington Group is set to deliver strong earnings growth into FY24F.

• Healthy tenderbook tempers slowdown concerns. While recent media reports have painted a more cautious outlook on the semiconductor industry, KGB views this as an “inventory adjustment” phase with robust tender activities still. The strong demand for high-tech chips used in data centres, EV, and 5G is mitigating the slowdown witnessed in consumer related products (ie smartphones and PCs). The positive outlook is driven by continuing fab capacity expansion, aided by policy initiatives to shore up domestic production. Of the latest tenderbook of MYR1.5bn, China makes up 47%, followed by Singapore (28%) and Malaysia (25%).

• Another record for new orders. On 5 Sep, KGB announced a MYR330m ultra-high purity (UHP) job for the bulk and specialty gas system distribution works for a wafer fab in Kulim. This brought YTD order wins to MYR1.28bn, breaching the earlier MYR1.19bn record from FY21. The outstanding orderbook of MYR1.9bn as of 6 Sep should keep it busy over the next 24 months. 76% of the outstanding orderbook is made up of the UHP segment, followed by general contracting (22%) and process engineering (2%). With a completion rate of 60% for the MYR420m Sarawak turnkey job (slated for completion by 1Q23), we see incremental margins accretion into FY23.

• Second plant in the making. A major supply disruption faced by its competitor in recent months has compelled two key F&B players to turn to KGB for liquid carbon dioxide supply with plant utilisation maxed out. It is now looking at constructing a second plant (next to its current Kerteh facility) that could see capacity double up (100,000 tonnes) by FY24. We see upside earnings risk if KGB successfully inks long-term supply agreements with the new F&B customers. 1H22 revenue from the industrial gas segment jumped 31% YoY, as stronger economic activities fuelled stronger offtakes.

• Forecasts and TP upgraded. We lift FY22F-24F earnings by 3-13% after raising our orderbook replenishment and LCO2 growth assumptions (factoring in the new on-site gas supply for an optoelectronics customer). Our TP is raised slightly to MYR1.71, premised on 25x FY23F P/E (+1 SD of historical mean), which we believe is well supported by the solid 67% FY22F core earnings growth and another +21% for FY23F. A 0% ESG premium is factored into our TP based on our proprietary scoring model. Key risks are weaker-than-expected margins, delays in project execution, and lower-than-expected orderbook replenishment.

Source: RHB Research - 8 Sep 2022