• Maintain BUY, new MYR3.03 TP (from MYR2.64), 26% upside. Kelington Group posted record FY23 earnings, thanks to stronger-than-expected revenue recognition across all segments and margin expansion. We lift our forecasts after factoring in higher progress billings and margin. We believe valuation is fair at 21x FY24F EPS (+0.5SD of historical mean) with the improved earnings delivery and robust demand from the industrial gas (IG) segment.

• Stellar quarter and FY. FY23 core earnings of MYR116m surged 88% YoY, surpassing ours and consensus estimates by 20% and 30%, with 4QFY23 alone making up 42% of the full-year earnings. FY23 revenue grew 26% YoY from higher contributions across all segments, specifically process engineering (PE) (+143% YoY). EBIT margin expanded c.3ppts (FY22: 6.2%) – thanks to the shift in revenue mix towards higher yielding services and lower administrative expenses. A DPS of 2.5 sen was declared, bringing full year DPS to 4 sen (FY22: 2.5 sen), a 25% payout.

• Positive contribution from all segments. The ultra high purity (UHP) segment remains the group’s main contributor (63% of revenue) with 25% YoY growth. This is mainly driven by stronger project billings across all key operating markets. The PE segment ballooned 143% YoY, mainly attributed to the tank pit expansion project secured in 4Q22. Similarly, the IG segment did not disappoint, rising 81% YoY growth in tandem with the heightened demand for liquid carbon dioxide (LCO2).

• Outstanding orderbook of MYR1.3bn as at end-FY23 (vs MYR1.7bn a year ago) will keep the group busy for the next 12 months. FY23’s new job wins were at MYR1.1bn, including a mix of UHP projects in China and Singapore. The group will focus on executing these projects while seeking new jobs with c.MYR2bn tenderbook. Looking ahead, we expect KGB to clinch more UHP projects, buoyed by the US-China tiff and the gradual rebound in the semiconductor space. Earnings prospect remains promising with the rise in higher-margin projects and the expansion of the LCO2 plant. The latter is underpinned by strong demand from Oceania markets, with margins more superior to the group’s conventional business.

• Forecast. We bump up our FY24-25 forecasts by 11-15%, after factoring in higher revenue and margin assumptions. FY26F is introduced with earnings projected at MYR130m. Our TP rises to MYR3.03, still pegged to an unchanged P/E of 21x with a 2% ESG premium added on. The target P/E is at -0.5SD of KLTEC’s 5-year mean, which we believe is fair given the current dynamics within the tech sector.

• Key risks are delays in LCO2 expansion, weaker-than-expected earnings, and lower-than-expected orderbook replenishment.

Source: RHB Research - 29 Feb 2024