Kelington Group (KGB)’s 1QFY23 results met expectations with net profit almost doubling YoY on healthy project deliveries across all operating regions, strong contributions from its ultra-high purity (UHP) segment, and a 145% jump in sales for high-margin industrial gases on robust demand from the F&B sector, maxing out utilisation at its LCO2 plant.
Kenanga Research mainatains maintains their forecasts, TP of RM1.92 and OUTPERFORM call.
Within expectations: KGB’s 1QFY23 results were in line with our expectation, delivering net profit of RM16.2m (+95% YoY) which accounted for 29% and 27% of our full-year forecast and the full-year consensus estimate, respectively.
Results’ highlights: YoY, 1QFY23 revenue jumped 78.2% on the back of robust project deliveries across all operating markets. Malaysia, which accounts for nearly half of the group’s revenue, saw an 82.9% growth, followed by substantial contributions from Singapore (+67.2%) and China (+68.9%). Delving into its business segments, its UHP gas delivery solutions remain the group’s anchor business (c.60% of group revenue) and recorded a 63.1% growth owing to strong demand from the semiconductor industry.
Furthermore, its industrial gases segment, differentiated by its higher gross profit margin of c.30% compared to other segments at c.15%, has more than doubled in revenue and now constitute c.8% to the group’s revenue. This was mainly driven by surging demand in the F&B industry which propelled the group’s liquid carbon dioxide (LCO2) plant to operate near peak capacity. As a result, 1QFY23 net profit almost doubled YoY.
Order flows remain buoyant: Against the backdrop of a slowdown in the technology sector, KGB has exhibited resilience and exceptional capabilities in sustaining a steady flow of job wins. The group has secured RM596m worth of new jobs YTD, putting it on track to achieve RM1b replenishment for the year, supported by an elevated tender book of RM2b. Furthermore, Kenanga takes comfort in the group’s earnings visibility stemming from its strong outstanding order book of RM1.8b which will keep the group busy into FY24.
Forecasts Maintained: Kenaga sees the group as viable due to it being a direct proxy to the front-end wafer fab expansion, its strong earnings visibility underpinned by robust order-book and tender-book exceeding RM1b, and its strong footholds in multiple markets, i.e. Malaysia, Singapore and China.
Kenanga keeps to their TP of RM1.92 based on an unchanged 22x FY23F PER, in line with peer’s forward average. The sector’s forward PER is the average of regional peers, namely PNC Process Systems and Linde. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us
Maintain OUTPERFORM: Risks to our call include: (i) chip makers halting their expansion plans due to oversupply, (ii) worsening Sino-US chip war, and (iii) delays in LCO2 expansion.
