• Maintain NEUTRAL and a MYR1.59 TP, 4% upside with c.2% FY23Fyield. Kelington Group’s steady share price performance over the past threemonths reflects the still-cautious sentiment on the chip sector, with theupside earnings risk priced in. Extended sector headwinds should persist in2H23, masking its robust earnings momentum. The stock’s risk-rewardprofile is largely balanced, at current levels.

• Robust YoY growth momentum should continue in 3Q23. KGB is slatedto announce its 3Q23/9M23 results on 23 Nov. We expect the double-digitYoY growth in revenue and core earnings to be sustained in 3Q23,supported by its outstanding orderbook of MYR1.8bn (as of end-June) andprogressive billings. To recap, 1H23 revenue and core earnings surged 51%and 62% YoY to record highs. The ultra- high purity (UHP) and industrial gassegments should remain the key growth drivers, with the liquid carbondioxide (LCO2) plant already running at maximum capacity. We expect thegroup to also announce new orders in 3Q23 post its results release, addingto the YTD-June order wins of MYR744m.

• Second ace up its sleeve. KGB’s new LCO2 (70,000 tpa capacity) isexpected to start production by year-end. We gather construction andancillary works are at the tail end, with all equipment on-site. The expandedcapacity will make it the largest LCO2 producer in Malaysia, followed byLinde Malaysia. With committed off-takes and the strong demand from theOceania markets (>70% of LCO2 is exported), the utilisation rate of thesecond plant should rise fairly quickly, potentially reaching 30% by 2Q24.

• Macroeconomic headwinds for the sector still. According to SEMI, siliconwafer shipments fell by 9.6% QoQ or 19.5% YoY declines in 3Q23 from ongoing inventory adjustments. Protracted sector headwinds aside, we remain cautiously optimistic on the longer-term prospects of the domestic semiconductor industry, on: i) The significant investments by tech giants such as Infineon Technologies (MYR25bn), Texas Instruments (MYR15bn) and Intel (MYR30bn); and (ii) the Government’s commitment to further expand the E&E industry as part of the New Industrial Master Plan 2030. In our view, KGB’s exposure at the front end of the value chain (wafer fabrication) places it in a sweet spot to capitalise on structural growth in hook-up and commissioning projects.

• Forecasts and valuation. We maintain our earnings forecasts and TP,pending KGB’s results announcement. Its YTD orders wins are on track toreach our FY23F orderbook replenishment assumption. Our TP is premisedon a fair 18x FY24F P/E, at +0.5SD from the historical mean, and bakes ina 2% ESG premium for the group’s commendable sustainability initiatives,especially in waste LCO2 conversion. Key upside/downside risks:stronger/weaker-than-expected earnings and larger/smaller orderbookreplenishment, project execution and developments within the tech sector.

Source: RHB Securities Research - 10 Nov 2023