Kelington (KGB) secured a batch of new Ultra High Purity (UHP) contracts worth a combined value of RM53m. These new contracts fall within our order-book replenishment assumptions as KGB continues to expand on its UHP segment. We reaffirm our BUY call and target price of RM1.60. KGB remains our top small-cap O&G pick.

Chinese UHP Segment Contracts Secured

KGB secured a batch of new Chinese UHP contracts worth a combined value of RM53m, largely for specialized engineering work for water fabs in China. The majority of these contracts were awarded by renowned semiconductor players in China, with the contracts targeted to be mostly completed by 2020.

Contract Wins In-line With Our Expectations

The procurement of these contracts brings YTD new order wins to RM146m, which falls within our expectations, making up 31% of our order book replenishment for 2019E. Inclusive of the new contracts, current outstanding order book stands at RM406m, with UHP contracts making up the bulk at 73% followed by Process Engineering (19%) and General Contracting (7%), respectively. It comes as no surprise that KGB emphasizes its UHP segment as management continues to focus on the high-margin segment and generating strong project flows beyond the domestic market.

Reaffirming BUY Call and TP of RM1.60

In our view, the ability to secure these new UHP contracts is testament of KGB’s strength in the segment across key operating markets amid intense competition. Furthermore, with the impending commencement of its liquid CO2 plant in 3Q19, we expect KGB’s earnings growth trajectory to be sustainable. We reaffirm our BUY call on KGB and 12-month target price of RM1.60, based on a 16x PER applied to our 2019E EPS. Key downside risks to our call include: i) a downturn in semiconductor sales, ii) delayed start-up of its LCO₂ plant, and iii) collapse in trade deal negotiations between major economies.

Source: Affin Hwang Research - 17 Apr 2019