Kelington sees opportunities

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KUALA LUMPUR: The recent plunge in crude oil prices may not necessarily spell gloom for all oil and gas (O&G) players. Little known Kelington Group Bhd, for one, said it sees opportunities amid the current low price environment.

Two years into its O&G venture, things are getting exciting for Kelington (fundamental: 1.4; valuation: 1.4). On June 3, it inked a collaboration agreement with Petro Allied International DMCEST (PAI), which will pave the way for it to access the world’s largest crude oil production hub.

Its joint venture (JV) with PAI, a company incorporated in Dubai, the United Arab Emirates, will allow it to bid for Middle East O&G jobs.

“Despite the weakening of crude oil prices, the Organization of Oil Exporting Countries (Opec) have no plans to reduce their production. Activities did not slow down and opportunities are still available,” said Kelington chief executive officer (CEO) Raymond Gan.

Last November, the powerful oil cartel Opec said it had no intention of cutting production levels to stem the collapse in oil prices. At that time, oil prices had fallen by about a third from a high of US$115 a barrel three months earlier. Analysts have estimated that global oil prices will stay below US$80 (RM303) per barrel in 2015.

A relative newbie in the industry, Kelington, which aims to become one of the major engineering, procurement, construction and commissioning (EPCC) contractors globally, has been busy building up its track record in the last two years.

It has so far managed to bag two contracts amounting to RM22 million from BASF Petronas Chemicals Sdn Bhd and Petron Refinery Malaysia Bhd in Port Dickson, Negeri Sembilan. 

Despite being a relatively new player, Kelington believes it has an advantage over more established rivals in that it can offer competitive bids.

“The decline in oil price has prompted all O&G firms to cut their expenses. As a new player, we can offer a more competitive bid. When there is a downturn, the owners are more likely to [keep a closer watch on] cost, and they are more willing to consider new players,” he explained.

Gan said the company’s focus will be on the downstream side of the industry, such as jobs to build oil tanks and piping works. 

The new venture with PAI will take time to yield results. Gan said it was unlikely that the venture would be able to secure any material projects this year as it would need time to prepare for future work.

He expects the group’s revenue growth to stay flat this year. “Based on the current order book we have, we are of the view that revenue for the current financial year ending Decr 31 2015 (FY15) will be comparable with FY14,” he said.

In FY14, the group registered a net profit of RM5.18 million on the back of revenue of RM189.66 million.

As at May 31, 2015, Kelington’s order book stood at RM250 million, with RM197 million outstanding. With this, the group expects to be kept busy for the next 12 to 15 months. The group is also tendering for some RM640 million worth of projects.

For its first quarter ended March 31, 2015, Kelington’s net profit was flat at RM2.08 million despite revenue falling by 27.42% to RM38.52 million from the same quarter a year ago.

On its RM148 million healthcare project from International Healthway Corp (IHC) in China, which has been put on hold, Gan said that the owner of the project has yet to get the licence from the authorities.

The project was temporarily put on hold in the second half of 2014 pending the authorities’ approval for the change of layout design, from a maternity centre to a full-fledged hospital. 

“We are not too sure when they are going to do that (get the licence). But we are actively talking to them and there is a possibility to break the contract or keep it hanging there,” he said.

He said there is also the possibility that the owner may give up on the project. “If so, then we may have to take out this project, about RM100 million in value, from our order book,” he remarked.

If that were to happen, he doesn’t think it will have a significant impact on Kelington. “We would still have a RM150 million order book that could support the company’s earnings,” he explained.

Over the past one year, trading in Kelington shares has been very volatile. From a high of 47.5 sen on Oct 3 last year, the stock dipped to a low of 30.5 sen on Dec 16 in the same year. 

The stock has, however, recovered somewhat over this year. It closed unchanged at 38 sen last Friday, with some 20,000 shares changing hands, with a market capitalisation of RM83.17 million.


(Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.)

 

This article first appeared in The Edge Financial Daily, on July 6, 2015.