• Maintain BUY, MYR3.35 TP, 10% upside with c.1% FY24F yield. Kelington Group’s (KGB) 1Q24 results were in line, with solid double-digit YoY growth. This was mainly attributed to the positive contributions from the Malaysia and China markets with the focus on high-margin projects. The stock’s valuation appears undemanding, at 20x FY25F EPS (-1 SD to KLTEC Index’s 5-year mean), backed by an outstanding orderbook of MYR1.3bn.

• A good start. 1Q24 core earnings of MYR24.5m (+51% YoY, -50% QoQ) met expectations, at c.20% of ours and the Street's full-year estimates. This was supported by 10% YoY improvement in revenue, buoyed by contributions from the China market (+128% YoY), coupled with lower finance cost following some debt repayment. In terms of margin, a higher contribution from industrial gas (IG) and ultra-high purity (UHP) led to an improved EBIT margin of 10.1% (1Q23: 7.8%). On a MoM basis, revenue dipped sequentially due to seasonal factors, with the EBIT margin squeezed 1 ppt as the contribution from UHP was lower. A first interim DPS of 2 sen was declared.

• Segmental contribution. 1Q24 revenue from the UHP segment surged 12% YoY due to higher recognition across the Malaysia and China markets, and remains the group’s main contributor (61% of revenue). On the flip side, the Process Engineering unit’s topline of MYR21.4m dropped 40%, as expected, primarily because the tank pit expansion project secured in 4Q22 is coming off its peak in the project’s S-curve.

• IG segment continues to gain traction, with 47% YoY growth in revenue – driven by heightened demand from Oceania countries (+20% YoY). The expansion of the IG segment will continue to drive margin expansion, underpinned by the commencements of: i) Second LCO2 plant (70k tonnes capacity) on 25 March, and ii) second on-site gas supply scheme in 2Q24 for an optoelectronics semiconductor giant in Kulim (total value of MYR180m for 10 years).

• Outstanding orderbook at MYR1.3bn. KGB’s outstanding orderbook of MYR1.3bn as at end-Mar should keep the group busy over the next 9-12 months. YTD-May new job wins stood at MYR375m, which includes a job awarded by China’s largest semiconductor foundry valued at MY143m. According to Semiconductor Equipment & Materials International (SEMI), installed global wafer fab capacity continues to increase – up 1.2% YoY in 1Q24 with an expected 1.4% YoY uptick in 2Q24. We believe the new upcycle in the semiconductor space positions KGB in a sweet spot to clinch more UHP projects.

• Forecast. We maintain our forecasts and TP pending the results briefing later today. Our TP is pegged to an unchanged target P/E of 21x on FY25 EPS, with a 6% ESG premium added. The target P/E is at+0.8 SD from the historical mean, which we believe is justified given the current dynamics within the tech sector.

Source: RHB Research - 24 May 2024