We recently toured Kelington’s (KGB) newly commissioned liquid carbon dioxide (LCO2) plant in Kerteh, Terengganu. The plant, which started production in October 2019, is currently operating at a 40% utilization rate and targets to achieve 50–60% utilization by end-2020. Encouraging take up in demand would bring forward expansion plans, allowing KGB to double its capacity and enhance its recurring earnings base. Maintain BUY rating and target price of RM1.60.

Expansion Plans in Place Once 80% Utilization Achieved

KGB started production at its 50,000-tonnes annual capacity LCO2 plant in Kerteh, Terengganu in October 2019. The plant obtains its raw CO2 gas from Petronas’ nearby gas processing plant on a pay-per-use basis; KGB will then remove impurities such as sulphur, hydrocarbon, water and nitrogen through multiple processes involving purifying, compressing and heating the molecules, before selling the end-product to its customers. The 3-acre land also houses 3 storage tanks with a total capacity of 600- tonnes, and serviced by three 24-tonne capacity road tankers. The company is consistently moving 3 loads of products daily, totaling ~70 tonnes. The current facility utilizes two-thirds of the existing land area, which allows for further expansion should its existing plant capacity reach 80% utilization. The remaining area would enable the doubling of its existing plant capacity to 100,000 tonnes.

Plant Is Operating at 40% Utilization

Of the plant’s current capacity, 40% has been taken up and management targets to achieve 50–60% utilization by end-2020. Most of the off-take is currently supplied to gas traders and cylinder refillers. KGB is in the process of qualifying its product with MNCs (frozen food manufacturer, and carbonated drink producers), and the results should be made known by end-3Q20.

Maintain BUY

We make no changes to our earnings forecasts, which have already factored in a 50% LCO2 plant utilization by end-2020. We believe the industrial gas business will be the main long-term earnings growth driver, and KGB targets to grow the recurring income stream to 30% of total revenue in the next 5 years. We maintain our BUY call with an unchanged target price of RM1.60, pegged to 17x FY20E EPS.

Source: Affin Hwang Research - 29 Jan 2020