RHB Investment Research Reports

Kelington Group - Resilient Amidst the Challenging Landscape

Publish date: Thu, 01 Jun 2023, 10:36 AM
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An official blog in I3investor to publish research reports provided by RHB Research team.

All materials published here are prepared by RHB Investment Bank Bhd. For latest offers on RHB Invest trading products and news, please refer to: http://www.rhbinvest.com

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  • 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

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