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This article first appeared in The Edge Financial Daily on January 30, 2020

Kelington Group Bhd
(Jan 29, RM1.30)
Maintain buy with an unchanged target price (TP) of RM1.60:
We recently toured Kelington Group Bhd’s newly commissioned liquid carbon dioxide (LCO2) plant in Kerteh, Terengganu. The plant, which started production in October 2019, is currently operating at a 40% utilisation rate and targets to achieve 50–60% utilisation by end-2020. Encouraging take-up in demand would bring forward expansion plans, allowing Kelington to double its capacity and enhance its recurring earnings base.

Kelington started production at its 50,000-tonnes annual capacity LCO2 plant in Kerteh, Terengganu in October 2019. The plant obtains its raw CO2 gas from Petronas’ nearby gas processing plant on a pay-per-use basis; Kelington will then remove impurities such as sulphur, hydrocarbon, water and nitrogen through multiple processes involving purifying, compressing and heating the molecules, before selling the end-product to its customers. The three-acre (1.21ha) land also houses three storage tanks with a total capacity of 600 tonnes, and serviced by three 24-tonne capacity road tankers. The company is consistently moving three loads of products daily, totalling approximately 70 tonnes. The current facility utilises two-thirds of the existing land area, which allows for further expansion should its existing plant capacity reach 80% utilisation. The remaining area would enable the doubling of its existing plant capacity to 100,000 tonnes.

Most of the offtake is currently supplied to gas traders and cylinder refillers. Kelington is in the process of qualifying its product with multinational corporations (frozen food manufacturer, and carbonated drink producers), and the results should be made known by end of the third quarter of 2020.

We make no changes to our earnings forecasts, which have already factored in a 50% LCO2 plant utilisation by end-2020. We believe the industrial gas business will be the main long-term earnings growth driver, and Kelington targets to grow the recurring income stream to 30% of total revenue in the next five years. We maintain our “buy” call with an unchanged TP of RM1.60, pegged to 17 times financial year ending Dec 31, 2020 earnings per share. — Affin Hwang Capital, Jan 29

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