Kelington Group Bhd ("KGB") growth trajectory continues with their industrial gas foray via a 15-year supply agreement from Petronas to purchase CO2 gas for their new plant (next to Petronas Gas Processing Plant) in Kerteh Terengganu. The plant is expected to start contributing by mid-2019. We are upgrading our target price to RM1.06 based on 12x PER FY19 FBM Small Cap Index average.

KGB recent results continues to show strong growth with revenue rising 28% and net profit almost doubling to RM8.6m in 1H2018 vs RM4.4m in 1H2017. This is supported by their core business division of Ultra High Purity ("UHP") gas and process engineering which tend to command better margins. 

KGB has secured new projects totalling RM236m to-date and management is confident it will be better than the RM374m secured last year. Outstanding orderbook of RM252m is expected to benefit from China's ambitious plans for self-sufficiency and Made in China 2025 for semiconductor and fab equipment. 

KGB's next growth catalyst would be their industrial gas division where they are building a CO2 plant next to Petronas Gas Processing Plant in Kerteh costing an estimated RM50-60m with production capacity of 50,000 tonnes per year. It recently completed 10% private placement raising RM17.8m to part-finance the venture This division started on strong footing last year with a RM20m 10-year contract for on-site gas supply to one of the largest manufacturers of solar cells and modules in Cyberjaya. 

KGB balance sheet remains sound with net cash position of RM40m and has 25% dividend policy translating to over 2% in dividend yield. In line with global semiconductor growth and their industrial gas business expansion plans, earnings are projected to continue to grow at double digit close to 30% FY18 and FY19. 

Source: Rakuten Research - 3 Sept 2018