Kelington’s (KGB) 2018 core net profit of RM23.7m (+27% yoy) topped our RM20.1m full-year estimate by 18%. The Ultra High Purity (UHP) division continues to be the main earnings driver with the highest margin across the board. We maintain our BUY call with an unchanged target price of RM1.60. KGB remains our top small-cap O&G pick.

4Q18 Results Above Expectations

KGB’s revenue jumped 72% qoq in 4Q18 to RM109.8m driven by an increase in UHP, Process Engineering and General Contracting works, with most orders originating from Malaysia and Singapore. As a result, KGB reported a record core profit of RM23.7m (+27% yoy) with the largest contribution derived from the UHP segment. Gross profit margin was slightly lower at 17.1% vs 20.7% qoq due to the absence of variation orders.

UHP Anchoring Revenue Growth and Earnings Contributions

KGB recorded 2018 revenue of RM349.2m (+10% yoy), an all-time high, largely driven by higher orders from China (revenue growth of RM52m) and Singapore (RM33m growth). UHP remains the group’s biggest contributor at 65%, followed by Process Engineering and General Contracting at 21% and 13% respectively. Revenue from the industrial gases division also grew from RM2.1m to RM3.6m with further upside expected in 2020, once the liquid CO2 plant commences operation by end 3Q19.

Maintain BUY With TP of RM1.60

2018 has been a remarkable year for KGB as it achieved a record order book replenishment of RM424m and secured its single largest contract win of RM93m in Singapore. This, coupled with the commencement of the liquid CO2 plant, is expected to continue to drive KGB earnings. We maintain our BUY call and target price of RM1.60, based on 16x PER on 2019E EPS. We continue to like KGB as we believe that the semiconductor outlook remains strong. Furthermore, we expect the commencement of the liquid CO2 plant in 3Q19 will contribute positively to earnings in 2020.

Downside Risks

Slowdown in semi-conductor sector growth, increased price competition and a breakdown in trade negotiations between the US and China.

Source: Affin Hwang Research - 27 Feb 2019