KGB has bagged its first contract in FY24, i.e. a RM143m gas hookup service contract for China’s largest semiconductor wafer foundry located in Shanghai (vs. our full-year job win assumption of RM1b). This is in addition to same service contract renewals for five other foundries of the same customer late last year. We maintain our forecasts, TP of RM3.28 and OUTPERFORM call. KGB is one of our top picks for the tech and tech-related sector.

1. KGB has bagged its first contract in FY24, i.e. a RM143m gas hookup service contract for China’s largest semiconductor wafer foundry located in Shanghai (vs. our full-year job win assumption of RM1b). The scope of the project entails the design, procurement, construction, and commissioning of a gas hookup system which falls under the UHP business segment. This foundry is specifically dedicated to research and development, as well as the mass production of 300mm wafers featuring process nodes of 14nm and below. The commencement of the contract is immediate, with a scheduled completion period spanning two years, concluding in Jan 2026. This is in addition to contract renewal for the same service for five other foundries of the same customer late last year, to be delivered over the next 12 months. We are highly optimistic over this win as it further solidifies the group’s dominant position in the region.

2. The group has also commenced the testing and commissioning of its LCO2 (liquid CO2) Plant 2, with a capacity of 70,000 tonnes per year, representing 1.4 times that of Plant 1. As it finalises the testing phase in the next couple of weeks, the group will be able to alleviate the bottleneck at Plant 1 (currently running near 100%) and address the overwhelming demand in Asia and the Oceania region, exacerbated by the worsening shortage of LCO2.

3. We are very optimistic about its latest job win, which marks a strong start towards achieving our targeted RM1b order replenishment for 2024. The new contract will be added to the group’s existing RM1.5b outstanding order book, while its tender book remains elevated at >RM2.1b. The robust tender pipeline is in line with SEMI's forecast of a 12% recovery in 2024, followed by a substantial 24% upcycle in 2025. We continue to reiterate KGB as one of our top picks for the sector, given its ability to consistently deliver strong earnings as it approaches the next semiconductor wave.

Forecasts. Maintained.

We keep our TP of RM3.28 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 thesis. We like KGB for: (i) it being a direct proxy to the frontend 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) chip makers halting their expansion plans due to oversupply, (ii) worsening Sino-US chip war, and (iii) delays in its LCO2 plant expansion.

Source: Kenanga Research - 10 Jan 2024