KGB’s high-margin UHP orders from wafer fabs now make up c.78% of its order book (c.60% in FY23), which points to strong earnings ahead. Its tender book now also includes jobs in Hong Kong and Germany. Meanwhile, its liquid carbon dioxide (LCO2) plant’s run rate has risen to c.58% (from c.40% in 1QFY24) on strong demand. We maintain our forecasts, TP of RM4.10, and OUTPERFORM call.

We came away from KGB’s post-1QFY24 briefing reassured of its promising outlook. The key takeaways from the meeting are as follow:

1. KGB continues to see a higher proportion of high purity (UHP) gas solution jobs in its pipeline, making up c.78% (vs. 60% in FY23) of its RM1.25b outstanding order book. This aligns well with the consensus expectation of semiconductor demand recovery in 2024. As an infrastructure contractor, KGB is an immediate beneficiary. Its tender book is significant at RM1.6b, predominantly potential jobs from China and Singapore. We learnt that the demand from China stems from the country’s ambitious goal to increase its semiconductor capacity by 60% in the next three years to cater for local consumption while Singapore’s demand comes from existing MNCs in the area looking to expand their capacity.

2. It has set up offices in Hong Kong and Germany, having been invited by its existing customers to bid for jobs at their wafer fab-related projects in these regions. It guided for RM1b new job wins in FY24 of which RM235m has been secured YTD.

3. Its LCO2 plants with a combined capacity of 120k MT (Plant 1: 50k MT; Plant 2: 70k MT) now operates at c.58% capacity (from c.40% in 1QFY24). This is commendable given that Plant 2 just came online last month while the older Plant 1 commanding 40% of total capacity continues to operate at full capacity. The strong uptake from the new plant is driven by demand from neighbouring countries, which are experiencing a shortage of LCO2. There is a permanent shortfall in LCO2 supply in neighbouring countries following plant shutdowns pursuant to their decarbonisation efforts. In contrast, KGB is able to continue to source raw gas without interruption from Petronas’ natural gas pipeline. We understand that it is in early discussions for potential acquisition followed by expansion of an LCO2 operator in Indonesia.

Forecasts. Maintained.

Valuations. We also keep our TP of RM4.10 based on an unchanged 21x FY25F 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 case. We like KGB for: (i) it being a direct proxy to the front-end 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) a slowdown in wafer fab investment, (ii) worsening Sino-US chip war, and (iii) low utilisation of its LCO2 plants.

Source: Kenanga Research - 27 May 2024