• Maintain BUY with MYR3.90 TP, 33% upside and c.3% FY24F yield. Kelington Group (KGB) delivered solid double-digit earnings growth in 9M23, on track for another record year. The favourable revenue mix, focus on profitability, and the rapidly growing industrial gas (IG) business saw margins hitting new highs for the quarter. The stock’s valuation remains undemanding at 18x FY25F EPS (1.5SD below KLTEC Index’s 5-year mean), backed by a compelling orderbook exceeding MYR1.4bn.

• In-line with record margins. 3Q24 core profit of MYR40m (+26% YoY, +59% QoQ) brought 9M24 earnings to MYR90m (+33% YoY) at 68% and 77% of ours and Street’s estimates. A seasonally stronger 4Q is expected. The favourable project mix saw GP margin hitting a quarterly high of 22.8%. YTD revenue fell 15% as contributions from Singapore and Malaysia declined due to the completion of several ultra-high purity (UHP) projects. QoQ, EBIT margin jumped 3 ppt to 14% (9M24: 11.8%) as IG contributions widened (13% vs 11% in 2Q24) with higher-margin projects execution. A third interim DPS of 2 sen was declared (9M24: 6 sen), reflecting a DPR of 42%.

• IG business is now the second largest after UHP… While the UHP segment continues to be KGB’s mainstay at 70% of revenue (3Q23: 62%), the IG segment is now the second largest contributor (13%), outpacing general contracting (GC) at 11%. GC and process engineering (PE) revenues fell 70% and 36% YoY, primarily as the Sarawak plant expansion and the tank pit project have reached the peak of their S-curves.

• …with impressive 31% YoY growth YTD. The commencement of the second liquid carbon dioxide (LCO2) plant in March boosted annual production capacity to 120k tonnes (from 50k tonnes), with further margin expansion. We remain optimistic on the IG business growth potential, with increasing demands from Oceania, Africa, and Indonesia markets.

• MYR1bn new orders YTD, outstanding orderbook at MYR1.4bn. The orders are expected to keep the group busy over the next 12 months and consists of UHP projects (74%), followed by PE (13%) and GC projects (12%). YTD-Sep 2024 new job wins stood at MYR1bn, including UHP jobs from China and a newly secured PE contract in Malaysia valued at >MYR100m. We see the extension of the US protectionist policies under the incoming Trump administration benefiting KGB with the aggressive expansion of the domestic fab capacity in China set to continue.

• We keep our FY24-26F earnings and TP pending the group’s results briefing later today. Our TP is pegged to an unchanged target P/E of 23x FY25F EPS (+1SD from historical mean), reflecting KGB’s unique exposure to robust growth in global fab capacity with China leading the expansion. A 6% ESG premium is baked into the TP. Key risks are weaker-than-expected earnings and orderbook replenishments.

Source: RHB Securities Research - 13 Nov 2024