Kelington’s (KGB) FY19 earnings look to be on track (1H19 earnings have already exceeded that for 1H18); we expect order book replenishment to match 2018’s level on a softer business environment. Work activities from China are expected to gain traction from 2H19. Separately, the liquid carbon dioxide (LCO2) plant will commence production by end Oct-19, which should further enhance earnings visibility for the group and could drive a DPS and valuation re-rating. We maintain our BUY call and 12-month target price of RM1.68.

UHP Still Steady Despite Slowdown

The slowdown in China’s semiconductor fabrication spending (Fig 3) is expected to turn around from 2H19. Over the past few quarters, KGB was able to sustain its earnings with more robust work activities in Singapore, which also garnered higher margins compared to other regions. The Taiwan operation is also expected to turn around in FY19 after securing its first solar project, with a 15–16% net profit margin.

Long-term Growth Catalyst From LCO2 Plant Starting Up

KGB has already secured customers for 30% of its LCO2 capacity, mostly from cylinder refillers, and will be able to break even at this level of utilization. Management targets to market the product beyond canister refillers to canned beverage producers. Furthermore, it has also begun looking to export KGB’s products by setting up storage tanks in Singapore for distribution. The plant is now guided to commence operation by end Oct-19 at the latest, after seeing a slight delay relating to installation of the water pipes and power supply. We expect the overall group profit margin to improve once the plant starts up as industrial gas margins are higher at 30% vs. 16–17% for the current business.

Reaffirm BUY

We maintain our BUY call and target price at RM1.68, based on a 16x CY20E PER. We believe KGB is a good proxy to ride on the recovery in the semiconductor capex cycle and we like the company for its strong net cash balance sheet of RM70m (RM0.23/share) and its upcoming industrial gas business model, which will likely propel the company towards the next phase of growth while enhancing earnings visibility and predictability. Downside risks to our BUY call include a continuous slowdown in global semiconductor spending, and deterioration in existing business margins

Source: Affin Hwang Research - 2 Oct 2019