• Keep BUY and MYR3.90 TP, 21% upside and 2% yield. Kelington Group offers a unique exposure to China’s raucous appetite for chip supremacy. Earnings prospects are well supported by the torrid pace of fab expansion across the key markets of China and Singapore. The industrial gas (IG) wing should also drive a new earnings leg-up over the mid-term, lifting KGB’s overall profitability. Stock valuation remains undemanding at 20x FY25F EPS (-1SD to KLTEC Index’s 5-year mean) considering that earnings are set to hit another record in FY24.

• Optimistic views. Management hosted a results call yesterday. Key takeaways: i) Demand for ultra-high purity (UHP) projects to remain strong (underpinned by a MYR1.6bn tender pipeline), ii) the strong outlook for the LCO2 business, and iii) unrelenting focus on bottomline (profitability). To recap, 1H24 core earnings grew 40% YoY on a better project mix and expanding contributions from the IG segment, with EBIT margin reaching a quarterly record of 10.7%.

• Healthy orderbook. KGB’s outstanding orderbook of MYR1.3bn as at end- June translates into a cover ratio of 0.8x. UHP projects formed the bulk of the orderbook at 77%, followed by general contracting (18%) and process engineering (5%). With Singapore tender awards likely to be backloaded into 2H24, we believe the group is on track to hit our FY24 orderbook replenishment assumption of MYR1bn (1H24: MYR564m). Singapore makes up the largest portion of the c.MYR1.66bn tenderbook at 33% (MYR556m).

• China market to account for new fab bulk. According to SEMI, global fab capacity is expected to expand by 6% in 2024 and 7% in 2025, underpinned by the proliferation of artificial intelligence-driven performance chips. Chinese chipmakers’ capacities are projected to grow at a much higher double-digit trajectory, with China accounting for the bulk of global fab set to come on line from 2023-2027. Phase 3 of China’s “Big Fund” investment in the semiconductor sector augurs well for KGB, which has a good track record of hook-up jobs with the East Asian nation’s largest foundry.

• LCO2 footprint expansion. KGB said talks are at the tail-end for the purchase of an existing LCO2 business in Indonesia with 70,000 tonnes capacity for MYR40m. It remains committed to expanding its regional footprint on growing LCO2 demand. Aside from Oceania, where KGB has secured a strong foothold, management is also exploring the India market.

• Maintain BUY. We maintain our forecasts, which have incorporated incrementally stronger margins and increased contributions from the fast- expanding LCO2 business. Our TP is premised on unchanged P/E of 23x on FY25F EPS with a 6% ESG premium bolted on. The target P/E is at 1SD above its historical 5-year mean, supported by tailwinds in the semiconductor sector, robust earnings delivery, and IG business’ strong growth prospects.

Source: RHB Research - 23 Aug 2024