• Stay NEUTRAL, new MYR1.44 TP from MYR1.41, 3% upside with c.2% FY23F yield. We expect the strong earnings growth to continue in FY23, backed by a MYR1.83bn outstanding orderbook (end 1Q23) and the ramp- up in the industrial gas segment. The enviable prospects are, however, priced in – with valuations at +0.5SD from the historical P/E mean, reflecting the recalibration taking place in the technology sector. Key upside/downside risks: Stronger-/weaker-than-expected orderbook replenishment and a rerating/de-rating in the technology sector.

• A more calibrated expansion in fabrication capacity. Kelington Group’s current tenderbook of MYR1.4bn (FY22: MYR2bn) is made up of ultra high purity (UHP; 70%), general contracting (GC; 20%) and process engineering (PE; 10%) jobs. YTD order wins of MYR568m (c.31% of FY22 order wins) suggest a more calibrated expansion in foundry capacity. According to the Semiconductor Industry Association, global semiconductor sales continued to post sharp YoY declines (March sales: -21.3%). Sales did tick up MoM in March by 0.3% – the first positive growth since May 2022. KGB is also benefitting from the US-China trade tiff, with principal foundries, eg GlobalFoundries, Micron Technology, and Siltronic ramping up wafer capacities in Singapore.

• Solid outstanding orderbook. KGB’s outstanding orderbook of MYR1.83bn as at 1Q23 translates into an orderbook-to-cover ratio of 1.4x, based on FY22 revenue of MYR1.27bn. Of the orderbook, c. 66% (1Q22: 64%) relates to the UHP segment, followed by 25% (1Q22: 32%) for GC and 8% (1Q22: 4%) for PE. We see incrementally stronger GPMs over the next few quarters, with a higher proportion of sales from the UHP and industrial gas segments.

• Industrial gases enjoying robust demand. Revenue from the industrial gas segment surged 145% YoY to a quarterly record of MYR24.1m, driven by stronger demand and penetration into Oceania. KGB’s Phase 1 liquid carbon dioxide (LCO2) plant (under ACE Gases) reached optimal utilisation in 1Q23 (91%), with the recovery in economic activities fuelling demand. The ongoing Phase 2 expansion (additional 70k tonnes) is on track for completion by end 3Q23 with commercial production to start in 4Q23. Given that KGB has secured off-takers for the new capacity, we see the utilisation rate of the second plant reaching c.30% by end 1Q24. Growth in the industrial gas segment will also be supported by the recurring on-site gas supply job secured from a semiconductor giant in Kulim in 2Q22 (valued at MYR180m over 10 years) for which commencement is expected in 4Q23.

• We make minor changes to our FY23F-25F earnings (1-2%) after tweaking our LCO2 growth assumptions. This lifts our TP slightly to MYR1.44, which is still pegged to 18x FY24F EPS (+0.5SD from the historical mean). The valuation reflects a 0% ESG premium/discount based on our proprietary scoring model.

Source: RHB Research - 1 Jun 2023