• Maintain NEUTRAL and MYR1.59 TP, 3% upside with c.2% FY23F yield. We expect Kelington Group to continue posting double-digit earnings growth in FY23, backed by an outstanding orderbook of MYR1.9bn and stronger contributions from the industrial gas segment. The larger mix of ultra-high purity segment (UHP) revenue should also drive an uptick in margins. The valuation of the stock is fair (at +1.5SD from the historical P/E mean), with its positive outlook already in the price.

• US-China chip sector tiff looks to be a blessing in disguise? KGB’s current tenderbook of MYR2bn comprises projects from China (46%), Singapore (35%) and Malaysia (15%). Management said the US chip sanctions are mainly on 14nm and lower technologies – this is not likely to hinder China’s aggressive wafer fab capacity expansion, which is focused on 28nm-or-higher technologies. Following the MYR1.2bn and MYR1.8bn new orders secured in FY21 and FY22, we think the pace of contract wins could normalise in FY23F. According to SEMI, total semiconductor manufacturing equipment sales are forecasted to decline, to USD91bn in 2023 from USD109bn in 2022, before rebounding in 2024 to USD107bn. KGB’s MYR1.9bn in outstanding orders as at end-Jan 2023 (Dec 2021: MYR1.1bn) should keep the group busy over the next 12-15 months.

• Margins should widen in FY23. KGB’s GPM and NPM narrowed to 11.1% and 4.6% in FY22 (FY21: 16.6%/5.8%), due to the higher proportion of billings from the general contracting (GC) segment. We gather that c.MYR131m (of the MYR289m in outstanding GC orders as at 4Q22) is related to the lumpy Sarawak turnkey contract for a global hard drive maker. This contract will be fully recognised by end-2Q23. The GC segment makes up 17% of the outstanding orderbook (FY21: 39%). With some normalisation of margins on the higher proportion of UHP jobs (72% of orderbook), NPM is expected to improve to c.5% in FY23F.

• Industrial gas segment will drive a new leg of growth. The liquid carbon dioxide (LCO2) plant has been running at full utilisation in recent months. With the new 10-year on-site gas supply agreement in Kedah to start in 3Q23, the industrial gas segment may enjoy a MYR18m pa revenue uplift. Management highlighted the Phase 2 LCO2 plant expansion (70,000 tonnes pa) is slated for completion, in 3Q23 with production to commence in the final quarter.

• We make minor changes to our earnings estimates (-2% to +1.3%) after tweaking our assumptions for the industrial gas segment. Our TP remains at MYR1.59, pegged to 21x FY24F EPS (+1SD from the historical mean). This incorporates a 0% ESG premium, based on our proprietary scoring model.

Source: RHB Research - 8 Mar 2023