• Keep BUY and new MYR4.12 TP from MYR3.90, 19% upside and 2% yield. We lift our earnings forecast for Kelington Group (KGB) following the upbeat 3Q24 results call. The strong growth in the industrial gas (IG) division and robust ultra-high purity (UHP) project pipeline are expected to uphold margin expansion. The stock’s valuation remains attractive at 20x FY25F EPS (-1SD to the KLTEC Index’s 5-year mean), considering that earnings are set to hit another record high in FY24.

• We remain sanguine on KGB’s earnings prospects. Key takeaways are: i) The focus on profitability with the continuing robust demand for UHP projects, ii) solid outstanding orderbook of MYR1.4bn, iii) rapidly growing LCO2 business, and iv) record tenderbook of MYR2.6bn.

• Record tenderbook. KGB’s tenderbook stood at MYR2.6bn as at end-Sep 2024, with Germany and Hong Kong making up the lion’s share (57%), followed by Singapore (20%), Malaysia (11%), and China (8%). KGB is jointly bidding with a Taiwanese partner for a new German foundry to be commissioned by Taiwan’s largest fab. We gather the tenderbook has yet to capture several mechanical, electrical, and plumbing (MEP) packages for a hyperscale data centre at the Elmina Business Park where it is vying for. While China’s tender activities slowed in 3Q, we believe the extension of the US protectionist policies under the Trump administration would continue to drive domestic fab capacity growth. Management guided YTD-Oct new job wins stood at c.MYR1.06bn (9M24: MYR1bn), suggesting FY24F orderbook replenishment may surpass FY23’s total of MYR1.1bn, with the positive momentum likely extending into FY25F, assuming a 50% tender success rate.

• IG business expanding steadily, with revenue growing 31% YoY YTD (3Q24: +28% YoY), driven by increasing demand from the global economic recovery and from the Oceania, Africa, and Indonesia markets. Utilisation of LCO2 plant has risen to 60% (annual production capacity: 120k tonnes), with an annual 15–20% increase in utilisation anticipated. The share transfer process for the remaining 9.3% of Ace Gases is expected to be completed this month, allowing KGB to fully consolidate the earnings from Dec 2024. Management revealed that the plans to acquire an LCO2 plant in Indonesia has been aborted due to the vendor’s inability to ensure long-term supply of gases.

• Forecasts upgraded. We lift FY24-26F core earnings by 2.2%, 6.6%, and 12.3% after factoring in higher job replenishment assumptions of MYR1.2bn (from MYR1bn) and better margins. Our new TP is premised on an 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 robust fab capacity expansion, strong earnings delivery, and the favourable prospects of the IG business. Key risks include delays in project execution and slow recovery of the tech sector.

Source: RHB Securities Research - 14 Nov 2024