Kelington Group Bhd
(April 17, RM1.31)
Maintain buy with an unchanged target price (TP) of RM1.60. Kelington secured a new batch of ultra-high purity (UHP) contracts worth RM53 million. These contracts fall within our order book replenishment assumptions as Kelington continues to expand on its UHP segment. The company remains our top small-cap oil and gas pick.
The contracts were mostly awarded by renowned semiconductor players in China, with the bulk of the projects targeted for completion by 2020.
With these contracts, year to date new order wins now stand at RM146 million, which falls within our expectations, making up 31% of our order book replenishment for earnings for financial year 2019 (FY2019E). The company’s current outstanding order book is RM406 million, with UHP contracts making up the bulk at 73%, followed by process engineering (19%) and general contracting (7%). It comes as no surprise that Kelington emphasises its UHP segment as the management continues to focus on the high-margin segment and generating strong project flows beyond the domestic market.
In our view, the ability to secure these new UHP contracts is testament of Kelington’s strength in the segment across key operating markets amid intense competition. Furthermore, with the impending commencement of its liquid carbon dioxide plant in the third quarter of 2019, we expect the company’s earnings growth trajectory to be sustainable. Our 12-month TP of RM1.60 is based on a 16 times price to earnings ratio applied to our 2019E earning per share.
Key downside risks to our call include a downturn in semiconductor sales, delayed start-up of its liquid carbon dioxide plant, and collapse in trade deal negotiations between major economies. — Affin Hwang Capital, April 17