INVESTMENT MERIT

-  More new contracts will boost its current order book of c.RM64m. In 1QFY13, the group has an order book of RM63.7m, of which RM39.7m (or 62%) remained outstanding. Of noteworthy is that besides the sizeable order book, the group has recently secured a totally new 2+1 year contract to provide total facility management services to one of the world’s largest chip manufacturers in Malaysia. Management estimated that this contract could contribute a minimum RM20m/year to the group’s revenue from FY13 onwards. Nonetheless, we have yet to impute any earnings contributions from the above mentioned contract into our FY13 order book assumption to reflect our conservative stance. The group has also secured a Letter of Intent for a Biodiesel project in Taiwan worth c.RM36m. Should the official contract been awarded by end June, c.40% of the contract revenue will be reflected in its 3QFY13 results.

-  Tender book updates.  Management remained optimistic in securing the Fusionopolis contract (which is worth c.RM35m) within the next 1-2 months with the aim to recognise 50% of the contract value in FY13. Meanwhile, the Healthway Medical contract worth c.RM75m should only be secured by next year. At the Taiwan's side, the group noted that a contract for waste water treatment amouting to RM30m would only likely be awarded in October. Together with the other two impending Wind Power contracts worth RM30m in value each, the potential total contract value that could be secured in CY13 could sum up to c.RM181m, 32% higher than the RM137m contracts value secured a year ago.

-  A minimum 25% dividend payout policy remains unchanged. Kelington has a low net gearing level of c.3% and intends to maintain its minimum dividend payout ratio policy (DPR) of 25%. If we were to be conservative and assume only a 30% DPR on its FY13 consensus net EPS estimate of 6.6 sen (note that Kelington declared a 2.0 sen DPS recently for FY12, which was at a miuch higher DRP of c.52%), this would imply a 2.0 sen DPS and translating into a c.4.0% net dividend yield.  

-  TRADING BUY with a TP of RM0.56. We value the stock at RM0.56/share @ 8.0x FY14 PER,  which is at a -0.5SD level below its 1-year forward average PER given the frail semiconductor industry condition. Even with our conservative valuation, the TP warrants a capital upside of c.10%.

SWOT ANALYSIS

-  Strength:  Unique market leader in UHP delivery system

-  Weaknesses:  Dependency on FDI and reinvestment  

-  Opportunities:  Technological advances in client industries

-  Threats:  Slowdown in the semiconductor industry

TECHNICALS

-  Resistance vs Support: RM0.560 vs RM0.460

-  Views: Neutral

-  Comments: Short-term uptrend seems taking into shape as the 20-days SMA line looks an inch away to cross above the the 100-days SMA line. Only a decisive breakout above 52 sen will see further upside to 56 sen based on fibonaci retracement method.

BUSINESS OVERVIEW

-  Kelington is a leading Ultra-High Purity (UHP) Gas and Chemical Delivery Solutions Provider in Malaysia, China, Taiwan and Singapore. Throughout the years, it has also diversified into the areas of system design and modeling, fabrication and installation, quality testing and certification, control and instrumentation and maintenance for various Foundries (Semiconductor / Flat Panel Display). In 2012, the acquisition of Singapore-based Puritec Technologies (S) Pte. Ltd has further strengthened its capability of becoming a one-stop facility solution provider encompassing the delivery of gas, chemical and exhaust.

BUSINESS SEGMENTS

The group offers a comprehensive range of services as below:

-  UHP system design:  Includes procedures such as ground and site analysis, feasibility studies, delivery system conceptualisation and so on.

-  Fabrication and installation:  Involves the physical construction and fabrication of the UHP delivery system. 

-  Gas and chemical delivery equipment:  It is either manufactured in-house or sourced externally according to design specifications.

-  QA and QC services: Generally encompass tests done on the air quality and the particle size and quantity observed at the end point of use.

-  Control and instrumentation:  It is responsible for the contant monitoring any Wafer Fabrication or FPD Fabrication Plant.

-  Maintenance and servicing:  Mainly for equipment such as Gas Cabinet,  VMB/VMP, and Abatement Sytem.

Source: Kenanga