• Maintain NEUTRAL and MYR1.59 TP, 3% upside with c.2% FY23F yield. Kelington Group’s robust earnings momentum should be supported by its sizeable orderbook and the timely capacity expansion of the liquid carbon dioxide (LCO2) business. That said, the stock’s risk-reward is largely balanced, given the slowdown in the semiconductor sector and with valuations at +0.5SD from historical P/E mean.

• 2Q23 in review. Management hosted its quarterly results call yesterday. The highlights were: i) The decelerating pace of fab expansion, ii) strong prospects for the LCO2 business, and iii) opportunities within existing basebuild jobs which would lead to hook-up jobs. To recap, KGB’s core earnings grew a commendable 62% in 1H23 against a 51% growth in revenue.

• Healthy orderbook. Its RM1.77bn outstanding orderbook (1H23) should see revenue and earnings hitting new milestones for FY23F. The largest contributor was the ultra-high purity (UHP) segment (68% of orderbook), followed by general contracting (24%), and process engineering (8%).

• 1H23 new orders totalled MYR744m (c.40% of FY22 order wins) with a MYR2.3bn tenderbook. KGB has benefitted from the US-China trade tiff with multiple fab expansion jobs undertaken in Singapore and China over the past 12 months. It is also participating in the newly announced fab expansion plans by a key customer in Kulim, and Texas Instruments in Kuala Lumpur. We are, however, cautiously optimistic on the group’s orderbook replenishment going forward, as many foundries have either stalled or deferred their expansion plans due to extended demand headwinds in the semiconductor industry.

• Ace Gases poised to be Malaysia’s largest LCO2 producer. With the construction of the second plant on track for completion in 3Q23, KGB will emerge as the largest LCO2 producer in the country, with over 100k tonnes of annual production capacity. We see utilisation ramping-up swiftly with offtakes secured, potentially hitting 30% by 1Q24. Demand growth will also be supported by the group’s expanded presence in the Oceania markets which rely exclusively on imported LCO2.

• Forecast adjustments. We make slight adjustments to FY23-25F earnings (0.1-1.4%) after updating our ASP assumptions for LCO2. Our TP is unchanged and pegged to 18x FY24F EPS (+0.5SD from the historical mean). The valuation reflects a 2% ESG premium.

• Downside risks: Weaker-than-expected earnings and orderbook replenishment, delays in project execution, and an extended de-rating of the tech sector. The converse would be the upside risks.

Source: RHB Securities Research - 25 Aug 2023