• Maintain BUY, MYR3.90 TP, 15% upside with c.2% FY24F yield. Kelington Group’s 1H24 results were in line, with solid double-digit YoY growth. This was mainly attributed to favourable product mix and the solid performance of the industrial gas (IG) division. Outstanding orderbook remains robust at MYR1.3bn – translating to 0.8x FY23 revenue. The stock’s valuation appears undemanding at 21x FY25F EPS (-1SD to KLTEC Index’s 5-year mean).

• Positive momentum continues. The group’s 2Q24 core earnings of MYR25.1m (+30.3% YoY, +2.7% QoQ) brought 1H24 earnings to MYR49.6m (+39.6% YoY). While this formed c.38% and 40% of our and the consensus’ full-year estimates, we deem it to be within expectations as a stronger 2H24 is anticipated. 1H24 revenue fell 10% YoY due to lower contributions from Singapore and Malaysia, with several projects at the tail-end. However, EBIT margin saw a 3.7% improvement from a more favourable project mix and higher contribution from the IG segment. A second interim DPS of 2 sen was declared, bringing 1H24 DPS of 4 sen.

• Segmental contributions. The ultra-high purity (UHP) segment contributed the lion share of revenue at 69.1%, with a 25% YoY decline (+8% QoQ) due to the completion of several UHP projects in Singapore. Revenues from process engineering and general contracting segments also fell 31.9% and 37.3% YoY with lower progress billings as the tank pit and plant expansion projects are coming off the peak of the S-curve.

• IG segment continues to gain traction, with 33% YoY revenue growth for 1H24, thanks to the commencement of the second liquid carbon dioxide (LCO2) plant (end-Mar) and improved yields. We believe the IG segment will continue to drive overall margin expansion for the group, underpinned by the expansion into Indonesia and increasing demand, particularly from the Oceania, Africa, and India markets.

• Outstanding orderbook of MYR1.3bn as at end-Jun should keep the group busy over the next 9-12 months. YTD-Jun new job wins of MYR564m are on track to meet our target replenishment of MYR1bn for FY24F, armed with a tenderbook exceeding MYR1.6bn. The majority of the jobs secured are from China, where we gather fab expansion plans remain fervent. We believe the upcycle in the semiconductor space and the active tender pipeline in Singapore for 2H24 will bode well for KGB with more UHP projects in the offing.

• We keep our earnings forecasts and TP pending the results briefing later today. Our TP is premised on 23x FY25F P/E (+1SD from historical mean) to reflect the tailwinds in the tech sector and strong earnings delivery. A 6% ESG premium is baked into our TP based on our in-house ESG scoring methodology. Key risks are weaker-than-expected earnings, project execution delays, weaker orderbook replenishment, and a downshift in the tech cycle.

Source: RHB Research - 22 Aug 2024