We remain bullish on Kelington Group Bhd’s (“KGB”) prospects and growth trajectory as their industrial gas plant commence operations which has made its maiden delivery, enjoying decent gross margins of over 30% vs the existing 16%. As such, we believe KGB to see record earnings in FY20 and FY21. Hence, we are upgrading our target price to RM1.83 premised on 17x PER FY20 as per closest related peers.

KGB’s industrial gas business is finally taking off as their carbon dioxide (“LCO2“) plant with an annual capacity of 50,000 tonnes production capacity commenced operations last October - has delivered their first production of LCO2 gas to cylinder refillers and is slowly gaining market acceptance as they target major F&B players next.

Outstanding orderbook of RM312m with RM227m new orders secured in 2019 will continue to provide earnings visibility as their core segment in ultra high purity (UHP) and process engineering (PE) making up the bulk of contracts which typically carry higher margins than general contracting. Tenderbook remain robust at over RM1bn notwithstanding a slight slowdown in semiconductor spending. According to SEMI, global spending is expected to rebound in 2020 with 20% growth with China accounting for 16% of the semiconductor fab capacity remains as KGB’s key market.

KGB is on track to deliver yet another year of record profits for FY19 backed by their solid orderbook. KGB is also poised to continue its fine run for FY20 and FY21 anchored by LCO2 growth with eventual 30% contribution in revenue within 3 - 5 years providing more stable and recurring income stream.

Balance sheet remains healthy and remains in net cash position of RM70m (RM0.23 per share) which provides them the firepower to continue investing in higher margin industrial gas business scaling up LCO2 plant to challenge incumbent market leader Linde Malaysia for market share. We expect KGB to register EPS growth of 31% and 16% for FY 20 and FY21 respectively.

Source: Rakuten Research - 11 Nov 2019