• Stay NEUTRAL, new MYR1.41 TP from MYR1.59, 6% upside with c.2% FY23F yield. Kelington’s 1Q23 revenue and earnings are ahead of expectations, mainly due to higher-than-expected revenue recognition. We lower our target P/E from 21x to 18x – at +0.5SD from its historical mean – to factor in the more cautious sentiment in the tech sector and the normalisation in industry prospects. Key upside/downside risks: Stronger/weaker-than-expected orderbook replenishment and a re- rating/de-rating of the tech sector.

• Earnings beat. KGB’s 1Q23 core earnings of MYR16.3m (+95.4% YoY, -9.9% QoQ) are ahead of expectations, at 26% and 28% of our and Street full-year estimates. While revenue dipped sequentially on seasonal factors, the higher revenue contribution from the process engineering (PE) and industrial gases (IG) segments boosted the group’s GPM to 12.3% (4Q22: 10.4%). As financing costs rose to MYR3.3m (4Q22: MYR1.7m), core earnings contracted 10% QoQ.

• Positive growth across all segments. The 1Q23 revenue from the ultra- high purity (UHP) segment surged 63% YoY from higher revenue recognition across all markets, and remains the largest contributor to group revenue (accounting for 60%). The PE unit’s turnover of MYR35.7m (12% of total revenue) jumped 199% YoY, primarily from the tank pit expansion project secured in 4Q22, while the revenue from IG business shot up by 145% YoY. The utilisation rate of KGB’s liquid carbon dioxide plant is at 91%, boosted by its penetration into Oceania countries.

• Outlook. With MYR568m in new contracts secured as at end-April, and supported by a MYR2.27bn outstanding orderbook, KGB should be able to weather through the broader slowdown in semiconductor sales. According to Gartner, global semiconductor revenue is projected to decline by 11.2% YoY in 2023 before rebounding by 18.5% YoY in 2024.

• Forecasts. We raise FY23-25F earnings by 4-5% after increasing our orderbook replenishment assumptions. We also ascribe a lower target P/E of 18x (from 21x) to reflect a more conservative view on the tech sector’s outlook, the macroeconomic headwinds in China, and sluggish consumer demand. Our valuation is fair, at +0.5SD from the historical P/E mean – considering its still-solid orderbook. Our TP incorporates a 0% ESG premium/discount as KGB’s ESG score is on par with the country median.

• ESG framework update. As there is now a greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 22 May 2023