Kelington (KGB) has announced its maiden 2019 contract win amounting to SG$31m (RM93m). The group is off to a good start to surpass the FY18 total replenishment wins of RM424m, which were a record high. The award of this contract by one of the world's largest gas companies showcases KGB’s ability and repute as a UHP player. We maintain our BUY call and target price of RM1.60.

Details of Singapore Win

Under this contract, KGB will be involved in the design and construction of an Ultra High Purity (UHP) electronics special gases plant, which also includes the mechanical and electrical works and the supply of a process system for the plant. KGB has completed the design work and will commence construction work by March-19, targeted for completion by end-19. Assuming a 16% gross profit margin (in line with the historical UHP segment margin), we expect this to contribute RM15m to our FY19 gross profit forecast, making up 22% of our estimate.

Within Our Expectations

We make no changes to our assumptions as this falls under our FY19 replenishment target of RM500m. Inclusive of this win, the outstanding order book stands at RM468m (UHP continues to make up the bulk at 65%, process engineering at 23% and general contracting the remaining 12%). The tender book remains sizable at RM1.2bn, focusing mostly on the UHP segment across all markets.

Reiterate BUY and RM1.60 Target Price

We maintain our BUY call on KGB and 12-month target price of RM1.60, based on a 16x PER on fully diluted FY19E EPS. We continue to like the company as it is likely to benefit from the high capex spending in China’s semiconductor industry, and given the compelling long-term growth story as it expands into the industrial gas market. Downside risks to our BUY call: i) downturn in semiconductor sales, ii) delayed start-up of LCO₂ plant, and iii) the imposition of US sanctions upon China.

Source: Affin Hwang Research - 12 Feb 2019