• BUY, new MYR3.85 TP from MYR3.35, 27% upside with c.2% yield. Key 1Q24 results call takeaways: i) Tender activities to pick up in 2H24 on positive sector tailwinds; and ii) there is strong upside from the industrial gas (IG) segment. We remain upbeat on Kelington Group’s earnings growth prospects, with margin accretion from its favourable orderbook mix and expansion into new markets. Our new TP is pegged to a higher target P/E of 23x on FY25F full diluted EPS (-0.5SD from KLTEC Index’s 5-year mean). It also includes a 6% ESG premium, to reflect ESG initiatives made.

• Favourable orderbook mix; MYR1.6bn tenderbook. Kelington Group’s outstanding orderbook of MYR1.3bn (end-Mar) indicates that there could be another record year in the making. Ultra-high purity (UHP) projects made up the largest portion at 78%, followed by general contracting (16%) and process engineering (6%) jobs. Management expects tender activities to ramp up in 2H24. 60% of the tenderbook is made-up of projects in China/Hong Kong, followed by Singapore (30%) and Malaysia (10%). KGB has also been invited to tender for a maiden project in Europe. Assuming a 50% success rate, total orderbook replenishment for FY24F could surpass our assumption and FY23’s MYR1.1bn. Of the MYR375m orders secured to date (as of end-May), the bulk is from China – mainly from the largest chip foundry.

• IG business scaling up nicely. IG revenue grew 49% YoY in 1Q24 (FY23: +81%) with robust off-takes and optimal plant utilisation. The second liquid carbon dioxide (LCO2) plant (P2, annual capacity of 70,000 tonnes) commenced operations in late March with the overall utilisation rate at 58% (200 tonnes/day). In addition to the Oceania markets, KGB has started supplying LCO2 to South Africa and India. It is also in discussions to acquire an existing LCO2 business in Indonesia with a similar capacity to its P2 plant. We view the potential acquisition positively, due to the strong underlying domestic LCO2 demand in Indonesia (larger than Malaysia) which is only partially met by KGB’s existing supply contracts. With additional capacity taken up by existing markets or customers, the new on-site gas supply contract in Kedah (worth MYR180m over 10 years), and potential new markets, IG revenue is set to climb. KGB also plans to start a LCO2 business in the Philippines, and enter the gas trading business in India.

• Forecasts upgraded; higher target P/E to reflect positive tech sector dynamics. We lift FY24-26F earnings by 6-9% after incorporating stronger margin and ASP assumptions for the LCO2 business. Our new TP of MYR3.85 is pegged to a higher target P/E of 23x on FY25F fully diluted EPS (from 21x previously), at +1 SD from its historical 5-year mean, to reflect the tailwinds in the semiconductor sector, strong earnings delivery and the IG business gaining traction. Downside risks are weaker-than-expected earnings and orderbook replenishment.

Source: RHB Research - 27 May 2024