Kelington (KGB) is an established ultra-high purity (UHP) delivery systems provider with 18 years of experience. The next wave of growth will likely see the group leveraging on its past experience, moving upstream and expanding into the supply and trading of industrial gases. KGB has an advantage entering into this new business, which should also help to provide longer-term earnings visibility and better margins. We initiate coverage with BUY rating and a target price of RM1.60.

Started as a UHP System Provider

KGB started operations in 2000 to provide UHP gas delivery solutions (design and building) to the electronics and semiconductor industries. Over the years, KGB 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 O&G, oleo-chemical, F&B, biotech and medical industries.

Poised to be the Second Largest Industrial Gas Supplier

KGB’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 longterm recurring income stream to KGB (~5-10% of revenue). We believe prospects are bright as the usage of industrial gases continues to expand rapidly into various industries.

Still at Early Growth Stage With Industrial Gases

Our 2019E and 2020E core net profit are set to post 3-year CAGRs 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 re-rating catalysts in the coming years, which would also help to lift the overall group margin.

Initiating With a BUY Rating and Target Price of RM1.60

We initiate coverage on KGB with a BUY call and 12-month TP of RM1.60, based on a 2019E PER of 16x. We like the company for a few reasons: i) the semicon 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 MOX days. Downside risk: downturn in semiconductor sales.

Source: Affin Hwang Research - 3 Oct 2018