Kelington Group - Expanding to Hong Kong and Germany

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+0.93 (37.65%)

KGB is buoyed by overwhelming UHP orders, which now make up c.74% of its order book (c.60% in FY23). It is expanding to Hong Kong and Germany backed by new demand. Pending the completion of its second LCO2 plant, it is acquiring a third one. We maintain our forecasts, TP of RM3.40, and OUTPERFORM call.

We came away from KGB’s post-4QFY23 briefing feeling upbeat about its prospects. The key takeaways from the meeting are as follow:

1. KGB is seeing early signs of tailwinds forming as demand for its ultra- high purity (UHP) gas solution has jumped to c.74% of its order book (vs. 60% in FY23). This upturn aligns with the consensus expectation of a semiconductor demand recovery in 2024. As a primary beneficiary, KGB is experiencing an uptick in job tender invitations from wafer fabs across China, Malaysia, and Singapore, where it maintains a dominant presence. Furthermore, responding to requests from existing MNC customers, the group is actively bidding for projects in new regions, such as Hong Kong and Germany. To facilitate this expansion, the group has established a Hong Kong subsidiary and is set to finalise the incorporation of its Germany subsidiary soon. Leveraging its status as a qualified vendor with a proven track record, the group remains optimistic about its prospects as it ventures into new markets.

2. Its LCO2 (liquid CO2) Plant 2, with capacity of 70k tonnes/year or 1.4x of Plant 1, has been completed and is undergoing testing and commissioning. The group aims to begin exporting from Plant 2 by mid- March which will alleviate the bottleneck at Plant 1 (running near 100%) as demand continues to increase with a worsening shortage of LCO2 in Asia and the Oceania region. Furthermore, recognising the escalating demand in Indonesia, the group is in the early stages of discussions for the potential acquisition of an LCO2 company in the country, promising further expansion of its overall capacity.

3. The recent upswing in KGB's quarterly results merely hints at the vast potential that is yet to unfold. Our conviction in KGB's prospects is well- founded, supported by its impressive >RM1.9b tender book, in line with SEMI's forecast of a 12% recovery in 2024, followed by a substantial 24% upcycle in 2025. Be it a smooth or bumpy recovery for the semiconductor sector, the group has RM1.3b outstanding orders in its bag to navigate any obstacles that may come along, thereby fortifying its readiness for the next wave. We are expecting another RM1b order replenishment in FY24.

Forecasts. Maintained.

Valuations. We also keep our TP of RM3.40 based on an unchanged 21x FY24F PER. Our valuation represents a c.10% discount to peer’s forward mean PER of 24x which includes global players such as Air Products, Air Liquide and Linde. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like KGB for: (i) it being a direct proxy to the front-end wafer fab expansion, (ii) its strong earnings visibility underpinned by robust order book and tender book exceeding RM1b, and (iii) its strong foothold in multiple markets, i.e. Malaysia, Singapore and China. Maintain OUTPERFORM.

Risks to our call include: (i) delayed in wafer fab expansion plans, (ii) worsening Sino-US chip war, and (iii) delays in its LCO2 plant operation.

Source: Kenanga Research - 1 Mar 2024

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