• Keep BUY, with new MYR3.35 TP from MYR3.03, 11% upside, 1% FY24F yield. We believe the two-year downcycle in the semiconductor industry is at the tail-end. This should bolster the sentiment of tech stocks with front-end exposures to the value chain (wafer fabrications) benefitting ahead. Kelington Group trades at an undemanding 20x FY25F EPS (-1 SD to KLTEC Index’s 5-year mean), supported by an outstanding orderbook of MYR1.3bn.

• RHB upgraded the technology sector to OVERWEIGHT from Neutral on 1 April. We are of the view that the chip sector is in the early days of a new upcycle. The positive view is premised on: i) An uptick in global semiconductor sales, ii) inventory corrections hitting a trough, and iii) strong smartphone-related orders and AI-led component demand. KGB’s unique position as a hook-up contractor for key foundries in China and Singapore puts it in an enviable position to benefit from the sector’s renewed tailwinds.

• We expect double-digit YoY growth momentum in revenue/core earnings to continue in 1Q24, supported by the robust ultra-high purity (UHP) progress billings with some seasonal effects (higher base in 4Q23) from the Lunar New Year period. We expect overall GPM to stay at mid-double digit as UHP projects continue to make up the lion share of revenues (4Q23:74%, 4Q22: 72%). This is on top of the rapidly growing higher yielding industrial gas business with the second LCO2 site (70,000 tonnes) coming on stream.

• US tariffs on China – a boon for Asia. The recent doubling of tariffs on China semiconductor imports from 2025 was an extension of the US hard line policies implemented during the Trump administration. We see this as further strengthening Malaysia’s attractiveness as an alternative supply chain hub under the China Plus One (C+1) strategy. This should augur well for KGB, being the preferred hook-up and commissioning specialist for most Singapore wafer foundries and existing foundries in Malaysia. KGB’s timely expansion into Germany is also expected to gain traction amid the US-China geopolitical tension.

• Forecasts, valuation, and ESG updates. Our forecasts are maintained pending the result release on 23 May. That said, our TP rises to MYR3.35 after rolling forward our base valuation to FY25F, still premised on 21x FY25F P/E (+0.6SD from the historical mean), with a revised 6% ESG premium baked in. We raise KGB’s ESG score to 3.3 (from 3.1) to reflect its early achievement of the target to cut CO2 emission intensity. Following the Dec 2023 review by FTSE Russell, KGB was upgraded to a 4-star ESG rating – placing it in the top quartile for ESG performance among the FBM EMAS constituents. KGB is also part of the FTSE4Good Bursa Malaysia Index and FTSE4Good Bursa Malaysia Shariah Index.

• Key risks include weaker-than-expected earnings, delays in project execution, slower-than expected recovery in tech sector, and orderbook replenishment.

Source: RHB Research - 21 May 2024