• Keep BUY, new MYR3.90 TP from MYR3.85, 16% upside and 2% FY24F yield. We expect Kelington Group to deliver another quarter of strong earnings, buoyed by its respectable orderbook and the robust performance of the liquid carbon dioxide (LCO2) business, which is now fully consolidated following a recent transaction. Our TP is pegged to unchanged target P/E of 23x on FY25F EPS (-0.5SD from the KLTEC Index’s 5-year mean).

• Decent 2Q24 results expected. KGB is slated to announce its 1H24 results on 21 Aug. We expect the strong YoY/QoQ growth in revenue and core earnings to continue, supported by a solid MYR1.3bn orderbook (end-Mar) and favourable product mix. Its GPM should remain at mid-to-high teens level as ultra-high purity (UHP) projects made up 78% of orderbook (1Q23: 66%) while the production of the second LCO2 plant (P2) is gaining traction, having commenced operations in late March.

• We gather new job wins exceeded MYR500m for 1H24, with the majority coming from China, where tenders are aplenty. While there have been some delays in the tender for Singapore projects, the company should still be on track to meet our MYR1bn orderbook replenishment target for FY24F. We see the sector tailwinds continuing well into FY25F, with chip makers benefitting from the strong demand for products related to data centres and generative AI. KGB is tendering for two key projects in Germany, potentially valued at MYR300- 400m, which if successful will further bolster its orderbook.

• The industrial gas (IG) segment has consistently raked in superior GPM of >30% vs 15% for the conventional business over the past three FYEs. IG revenue grew at a CAGR of 82% between FY21-FY23, and up 47% YoY in 1Q24. The new P2 plant (70,000 tonnes capacity) is expected to drive a new leg-up in earnings with growth spurred by robust demand from Oceania, Africa, and India markets. On its plan to acquire an existing LCO2 business and assets in Indonesia, we understand management is willing to walk away if the vendor is unable to fulfil terms and conditions set – which includes extending the raw LCO2 supply concession. That said, KGB remains committed to expanding its regional presence to capitalise on growing LCO2 demand.

• Consolidation of Ace Gases (AGSB). KGB recently acquired the remaining 9.3% stake in Ace Gases for MYR35.7m via a cash consideration of MYR10.1m and the issue of 7.6m new shares in KGB. We view this positively, as it allows the company to fully consolidate the earnings of the IG business, which is gaining traction via expansion and capacity growth.

• Forecasts upgraded, TP raised. We lift FY24F-26F earnings by 2.2%, 2.3%, and 2.5% after factoring in the AGSB acquisition, nominal adjustments on IG margin assumptions, and the increase in the share base. Our TP rises to MYR3.90 with a 6% ESG premium baked in. This is premised on 23x FY25F P/E (+1SD from historical mean) to reflect the semiconductor sector tailwinds, strong earnings delivery, and robust IG growth. Key risks are weaker-than-expected earnings, project execution delays, weaker orderbook replenishment, and a shift in the tech cycle.

Source: RHB Research - 15 Aug 2024