• Keep BUY and MYR3.03 TP, 19% upside and c.2% yield. We remain upbeat on Kelington Group’s earnings prospects post-results call with management. Key drivers are the fast-growing liquid CO2 (LCO2) business (commissioning of Phase 2), a potential upturn in the chip industry and sustainable margin expansion. At 21x FY24F EPS, the valuation of the stock appears fair (+0.5SD of its historical mean) with risk-reward being largely balanced.

• Healthy orderbook. KGB’s outstanding orderbook (as at end-Dec 2023) stood at MYR1.3bn, predominantly comprised of ultra-high purity (UHP) projects (74%), followed by general contracting (20%) and process engineering (6%) jobs. We are optimistic that the group can uphold its high margin as UHP projects gain prominence. KGB secured c.MYR200m new contracts as at Feb-2024, including a MYR143m contract from China's largest semiconductor foundry. Management remains committed to prioritising higher-margin projects, backed by a MYR1.9bn tenderbook and anticipated semiconductor sector recovery, supported by Semiconductor Industry Association's 13.1% growth forecast for 2024.

• Expanding its footprint. Management guided that KGB will extend its reach to Hong Kong and Germany. A subsidiary has been set up in Hong Kong, while in Germany, a subsidiary is expected in the next few months. The foray into new markets will provide significant opportunities for the group, especially with the latter expected to capture potential jobs from the European region. GPM in these markets are expected to be as high as those in Malaysia and Singapore (c.15% for the engineering segment). Currently, the group has c.MYR400m and MYR70m worth of tenders in Hong Kong and Germany. We view the expansion positively given KGB's strong track record with European fabs that have operations locally and in Singapore.

• Fueling growth. The LCO2 segment has seen tremendous growth (4-year CAGR: 94.3%), underpinned by robust demand in Oceania markets. With an additional 70k tonne capacity from the second plant (to commence in mid- March), KGB will become the largest local LCO2 producer. Looking ahead, the group will explore new markets in Indonesia to expand its overseas presence, driven by growing demand (mainly from F&B clients). With double the margin of the industrial gases (IG) segment compared to the conventional business, expanding IG operations will further boost its margin.

• Our forecasts remain unchanged as we incorporate better margin assumptions into our estimates. Our TP of MYR3.03 is pegged to an unchanged P/E of 21x on FY24F EPS with a 2% ESG premium baked in. The target P/E is at -0.5SD of KL Technology Index’s 5-year mean, which we believe is justifiable given the current dynamics within the technology sector. Downside risks: Weaker-than-expected earnings and orderbook replenishment.

Source: RHB Research - 1 Mar 2024