Industrial gas seen to provide Kelington with long-term income

This article first appeared in The Edge Financial Daily, on October 4, 2018.
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Kelington Group Bhd
(Oct 3, RM1.19)
Initiate coverage with buy and a target price (TP) of RM1.60:
Kelington Group Bhd is an established ultra-high purity (UHP) delivery system provider with 18 years of experience. The next wave of growth will likely see the group leveraging its past experience, moving upstream and expanding into the supply and trading of industrial gases. Kelington has an advantage entering into this new business, which should also help to provide longer-term earnings visibility and better margins.

 
Kelington started operations in 2000 to provide UHP gas delivery solutions (design and building) to the electronics and semiconductor industries. Over the years, it has continuously built its reputation by securing notable projects regionally and subsequently expanding into the process engineering and general contracting businesses, which broaden the company’s set of clientele to the oil and gas, oleochemical, food and beverage, biotech and medical industries.

Kelington’s venture into the business of supplying industrial gases is part of management’s long-term group growth initiative. Once the first plant is up and running by September 2019, the group will effectively be the second-largest liquid carbon dioxide (LCO2) player in town. This should help provide a long-term recurring income stream to Kelington (5% to 10% of revenue). We believe prospects are bright as the usage of industrial gases continues to expand rapidly into various industries.

Our financial year 2019 estimate (FY19E) and FY20E core net profits are set to post three-year compound annual growth rates of 13% and 22%, respectively, driven by prospective growth in China and Singapore UHP contract flows. We expect the progressive ramp-up at its LCO2 plant and future expansion projects to be key earnings rerating catalysts in the coming years, which would also help to lift the overall group margin.

We initiate coverage on Kelington with a “buy” call and 12-month TP of RM1.60, based on a FY19E price-earnings ratio of 16 times. We like the company for a few reasons: i) the semiconductor industry is still poised for continued growth; ii) huge China presence and benefits from “Made in China 2025” masterplan; iii) compelling long-term growth story as it expands into industrial gas market; iv) solid balance sheet with net cash; and v) management network and strong technical background from its Malaysian Oxygen Bhd days. Downside risk is a downturn in semiconductor sales. — Affin Hwang Capital Research, Oct 3