INVESTMENT MERIT

9M13 results below expectation... Kelington’s 9M net profit (NP) which contracted 60% to RM1.6m, accounted for only 17% of our FY13E NP of RM9.6m. The key negative deviations were: (i) slower attainment of new jobs in Malaysia, China and Taiwan; and, ( ii) lower margins for the current project mix.

…but FY14 could be a turnaround story given the upcoming new contracts. While we are cognisant of the slower job recognition and attainment this year, we believe that upcoming contracts could turn around the group’s fortune. Besides, its outstanding orderbook of RM44.6m, the group has recently received a Letter of Award to provide Ultra High Purity mechanical and electrical services and medical system for Kang Hui Maternity Center Services (Shanghai) Co. We gather that this contract which is worth USD46m (or c.RM148m) will commence soon this month and is expected to be completed by October 2014. While the final acceptance of the award is still pending the official approval by the financial institution (for the application of banking facilities), we are confident that the final approval would likely go through as per management guidance.

Tender book updates. Management remains optimistic in securing the Taiwan Biodiesel’s RM35m contract by January 2014. Together with the ongoing 2+1 year contract with one of the world’s largest chip manufacturers, total contracts that could be secured in 2014 could be c.RM200m, 37% higher than the expected contract value of RM146m secured in FY13.

A minimum 25% dividend payout policy remains unchanged. Kelington has finally turned to net cash position and this, we believe, allows the group to opt for higher dividend payout going forward. If we were to err on the conservative side by taking a 40% DPR from our FY14E EPS estimate of 6.0 sen (note that Kelington declared a 2.0 sen DPS for FY12, which was c.52% of DPR), this would imply a 2.4 sen DPS, translating into a c.5.1% of net dividend yield.

TRADING BUY with a lower TP of RM0.52 (from RM0.58). Post-update, we have downgraded our FY13 earnings estimate by 77% in conjunction with the group’s current performance. Nonetheless, we only trimmed our FY14 earnings estimate by 15% to reflect the lower margin arising from the project mix. We value the stock at RM0.52 @ 8.7X FY14 PER, which is at -0.5SD level below its 1-year forward average PER. Even with our conservative valuation, the TP warrants a capital upside of 11%. Accumulate on current price weakness.

TECHNICALS

-  Resistance: RM0.495 (R1), RM0.545 (R2)

-  Support: RM0.445 (S1), RM0.400 (S2)

-  Comments: Recently, the share price has rebound from a sharp decline since earlier of the month. Chart-wise, a breakout above psychological resistance @RM0.500 could stage a return of the upcycle towards RM0.545 and potentially RM0.590 next in a range bound cycle. Indicator wise, the chart remain positively bias in the short-term for potential rebound from the oversold condition.

BUSINESS OVERVIEW

Kelington is a leading ultra-high purity (UHP) gas and chemical delivery solutions provider with operations in Malaysia, China, Taiwan and Singapore. Throughout the years, it has also diversified into other 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 strengthen its capability of becoming a one-stop facility solution provider encompassing the delivery of gas, chemical and exhaust.

BUSINESS SEGMENT

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