Summary

• Kelington Group Bhd (KGB)’s 97.2% owned subsidiary, Ace Gases Sdn Bhd (AGSB) has committed to invest RM45.0m to set up its second carbon dioxide gas recovery plant at Kerteh, Terengganu (P2). P2 will be constructed and installed at the existing Kerteh site (P1) to produce beverage grade LCO2.

• The construction of the manufacturing facilities, that will produce an additional 70,000 tonnes of LCO2 per year shall commence in December 2022, and is expected to be completed by December 2023. Funding for the construction of new site will be finance by bank borrowings. This is expected to increase gearing level from 0.6x to 0.8x (based on 1HFY22 balance sheet data).

• In bid to build-up the contribution from the industrial gas segment (1HFY22 contribution at RM21.5m makes up to 4.4% of total revenue), we deem that it is necessary for the abovementioned investment to take place, given that P1 utilisation rate is already at 80.0%. This is also in tandem with the improved contribution over the years with the industrial gas segment delivering 2-year CAGR of 12.2% in the period of FY19-FY21.

• We believe that the sequential growth of the industrial gases segment will take place in the foreseeable future and will provide KGB with stable recurring income. This will also be back by the commencement of new onsite supply scheme over a 10 years period for an optoelectronics semiconductor giant in Kulim, Kedah from 1Q23. The move will generate a stable recurring revenue of RM180.0m that will span over a 10-year period.

• Elsewhere, KGB’s current outstanding orderbook at RM2.22bn comprising mainly from the UHP segment represents an orderbook-to-cover ratio of 4.3x against FY21 revenue of RM517.7m will provide strong earnings visibility over the next 2 years. We also note that, tenderbook remains robust at approximately RM1.50bn.

Valuation & Recommendation

• Given that there will be no contribution until the completion of new plant until 2024, we made no changes to our earnings forecast. We maintained BUY recommendation on KGB with an unchanged target price of RM1.70, pending the upcoming 3QFY22 results release tentatively on 18th November 2022.
• Our target price is derived by assigning a targeted P/E multiple of 20.0x to FY23f EPS of 8.5 sen. The assigned targeted P/E multiple is in tandem with the valuations of the technology sector that is trading at 19.8x for 2023.
• Risks to our recommendation and target price include weaker-than-expected targeted orderbook replenishment of RM1.20bn for FY23f. Any decline in semiconductor sales may dampen the large scale UHP projects delivery to China and Singapore, given that the UHP segment plays a major part in total revenue contribution and earnings growth.

Source: Mplus Research - 14 Nov 2022