Kelington (KGB) remains optimistic on its Ultra High Purity (UHP) business and believes that the long-term growth outlook in China remains intact. Despite a recent slowdown in China’s semiconductor capex, its Singapore business will likely cushion the short-term decline driven by expansion, while Taiwan will likely see higher activities ahead with active bidding in solar projects. The liquid CO2 plant is on track for completion by 3Q19 and commercial production in 4Q19. We maintain our BUY call and target price of RM1.72.

Main Anchor From UHP Division

KGB’s 2019E 20% EPS earnings growth will likely continue to be driven by its UHP business. While the focus has not permanently shifted away from China with the expansion of wafer fabrication plants still looking promising, the spotlight will shine on the UHP projects in Singapore, which also generally command a higher margin. Contribution from the Taiwan region has fallen from a high of 11% to 2% in recent quarters but management plans to refocus efforts in this region by actively bidding for more solarrelated installation and maintenance projects. The bulk of the current RM1.2bn backlog is still largely focused in China.

Liquid CO2 Plant on Track to Start Up by 3Q19

The piling work for the site has been completed. KGB has taken delivery of its tankers and is currently in the process of strengthening its chassis; it is on track for concurrent completion with the plant. Fabrication work for the plant’s equipment was done in China and will be delivered by the 1st week of July. Meanwhile, construction work is expected to commence in midJuly and targeted to be completed by September. To date, management has spent RM30m out of the RM50m estimated project capex, with the remainder to be used progressively to expand the CO2 tankers fleet. KGB has secured orders for 30% of the capacity, mostly by cylinder refillers as the end gas users generally prefer to see the product quality once the plant has started operation. This plant is expected to contribute about 8% of total profit in FY20E, which we have already factored into our model.

BUY With RM1.72 Target Price

We maintain our BUY call and target price at RM1.72, based on a 16x CY20E PER. The outstanding order book stood at RM330m as of endMarch 2019, an increase from RM260m as at end-2018, with the UHP business comprising 80%, process engineering (PE) at 16% and general contracting (GC) at 4%.

Source: Affin Hwang Research - 26 Jun 2019