Kelington’s earning set to gain from RM1.2b orderbook

by ANIS HAZIM / pic source:

KELINGTON Group Bhd’s earnings prospects are improving as it hit a record high orderbook of over RM1.2 billion according to RHB Research.

Its analyst Jeffrey Tan stated Kelington’s orderbook in Singapore alone made up 39% of its outstanding orderbook.

“In Singapore, where it is the leading ultra-high purity (UHP) engineering specialist, Kelington has bagged multiple contracts valued over RM300 million from GlobalFoundries Inc, Micron and Siltronic,” Tan wrote in a recent note on Kelington.

He added Kelington’s management is hopeful of securing a new hook-up job from China’s largest foundry, Semiconductor Manufacturing International Corp, which had earlier unveiled plans for a new US$9 billion (RM37.59 billion) plant in Shanghai.

In Malaysia, Kelington will focus on executing the landmark RM420 million contract in Sarawak for Western Digital (WD).

“We expect Kelington to sustain its margins, given management’s focus on more profitable or higher-yield contracts and improving offtakes for the industrial gas segment.

“With the large chunk of the outstanding orderbook linked to WD, general contracting works now contribute about 36% of its outstanding orderbook versus 57% for UHP and process engineering of 7%,” he noted.

Historically, Kelington’s higher-margin UHP segment contributed 70% of its orderbook.

The analyst noted the company’s management has maintained the guidance for gross profit and net profit margins at 15% and 5% respectively.

Kelington has obtained halal certification from the Department of Islamic Development Malaysia which will see an expansion for its food and beverages (F&B) segment.

“While it is a prerequisite to venture into the lucrative F&B segment, the expansion would be managed carefully so as not to trigger a competitive response from the industry leader (Linde Malaysia),” Tan added.

Kelington’s liquid carbon dioxide (LCO2) plant utilisation rate rose to 60% or 50,000 tonnes per capacity in the third quarter of 2021 with the reopening of economic activities under the National Recovery Plan.

“We expect the utilisation rate to reach 80% in the financial year of 2022 (FY22) on stronger export orders. Management is eyeing other speciality gases and will be adding more skid tanks for the transportation of LCO2 to Singapore,” Tan noted.

Kelington is exploring a new and potentially lucrative segment — frozen durians — for the export market using LCO2, which appears to be a more efficient alternative to liquid nitrogen.

“Frozen durians is a key component of Malaysian exports, with 30,000 tonnes of durian valued at RM74.1 million exported in FY20,” he said.

RHB maintains a “Neutral” call on Kelington with a target price (TP) of RM1.75 and 1% upside with 1% FY22F yield.

“While we remain positive on Kelington’s earnings prospects — with a record high orderbook of over RM1.2 billion — its FY22F price-earnings, being at 1.5 standard deviations from the historical five-year mean, suggests the upside is in the price.

“Our TP has factored in a 4% environmental, social and governance discount and implies 35 times FY22F earning per share, which is reflective of the still-buoyant outlook for the chip sector going into 2022,” Tan wrote in the report.

The key risk identified by RHB to the outlook include the sector-wide de-rating and stronger or weaker-than-expected order wins for Kelington.