KGB: Profitability Boosts Earnings Amid Revenue Dip, Target Price Raised

Despite a dip in revenue, strong profitability and an expanded tender book have driven a positive outlook for the company, leading to an increased target price from AmInvestment Bank. The bank has reiterated its “BUY” recommendation, raising the target price to RM6.00 per share from RM4.70.

Performance Review

For the first half of 2025 (1H25), the company delivered a robust 15% year-on-year growth in core profit, reaching RM59 million, which aligned with expectations. This solid performance was primarily attributed to enhanced profitability margins, with Patami margins expanding by 2.9 percentage points year-on-year. The improvement was driven by a more favourable product mix, particularly from higher-margin ultra-high purity (UHP) projects, which now constitute 65% of its order book. Additionally, fewer operational disruptions contributed to better project executions.

However, the period also saw a notable decline in revenue. Second quarter 2025 (2Q25) revenue fell 12.2% year-on-year to RM282 million, contributing to a 1H25 revenue decrease of 16.4% year-on-year to RM552 million. This decline was partly due to softer demand in certain segments, particularly UHP/Advanced Engineering, which saw a 16.7% year-on-year revenue reduction in 2Q25.

Future Outlook and Strategic Expansion

Looking ahead, the company is poised for stronger execution in the second half of the year. Its outstanding order book stands at RM1.33 billion, providing healthy earnings visibility for the coming periods. Critically, this figure does not yet include two recently secured sizeable projects from Europe and Malaysia, collectively valued between RM250 million and RM350 million. The company’s tender book has shown significant expansion, growing 35% quarter-on-quarter to RM5.4 billion.

Strategic initiatives are also underway to bolster long-term growth. The company is actively expanding its geographical footprint with a new subsidiary established in Japan to capitalize on major semiconductor investments from players like Rapidus, Micron, and TSMC. Similarly, Kelington India is being set up to pursue engineering works in the region. Furthermore, the group is venturing into green hydrogen, aiming to provide engineering and operational expertise for production and manufacturing initiatives. An award for another large European project is anticipated by early fourth quarter 2025, which is expected to be a significant catalyst.

Valuation and Recommendation

AmInvestment Bank’s revised target price of RM6.00 is based on a forward-looking valuation, rolling forward its base year and revising the target Price-to-Earnings (PE) multiple to 25x from 21x. This new PE multiple is set at one standard deviation above the company’s five-year average, reflecting expectations of a fund flow-driven rerating. The bank highlights the company’s strong earnings visibility amidst external trade uncertainties and a scarcity of high-quality investment opportunities within the sector as key drivers for this premium valuation. The “BUY” recommendation is maintained due to the positive long-term prospects.