Company expects its foray into industrial gases to pay off by next year
WITH its diversification into the supply of industrial gases, Kelington Group Bhd is trying to kill two birds with one stone – achieve a higher gross profit margin and boost the company’s recurring income stream.
Come January next year, the new business segment is expected to deliver a stonger revenue contribution to the group’s overall top line, driven by its first industrial gas supply contract clinched in March this year.
The contract, which involves on-site supply of nitrogen gas to a photovoltaic cell manufacturer in Malaysia, will provide a long-term revenue of about RM20mil over a period of ten years.
Kelington’s foray into the industrial gas business last year is reasonable, given the projected 30% to 40% gross profit margin from the segment. This is significantly higher than the group’s overall gross profit margin of 10% to 15%, currently.
Speaking with StarBizWeek, Kelington chairman and chief executive officer Raymond Gan describes the group’s venture into the industrial gas segment as “natural progression”.
“We started our operations seventeen years ago to provide ultra high purity (UHP) gas delivery solutions to the electronics and semiconductor industry, which is still our mainstay business.
“Given our long-built experience and expertise in the field, it is relevant for us to penetrate the industrial gas segment in order to provide an end-to-end service.
“The venture into the industrial gas segment is a step in the right direction as it is synergistic with our existing core business.
“In fact, our clients consist of electronic manufacturers who utilise gases in their manufacturing processes.
“Based on the industry’s prevailing gross profit margin, we are positive that the new segment will improve the group’s margins moving forward,” he says.
Gan is one of Kelington’s substantial shareholders, with an equity interest of nearly 40%.
Kelington’s venture into the industrial gas segment will also be instrumental in strengthening the group’s recurring income visibility.
To note, the Main Market-listed company’s current recurring income contribution is actually negligible.
However, with further expansion in its industrial gas business, Kelington aims to derive nearly 30% of its top line in the form of recurring income.
This is expected to be achieved over the next three to five years, according to Gan.
Two weeks ago, the integrated engineering solutions provider secured its second major industrial gas contract, following a 15-year supply agreement between its subsidiary and Petroliam Nasional Bhd (Petronas).
Its 94%-owned subsidiary, Ace Gases Sdn Bhd, will be purchasing over 50,000 tonnes of carbon dioxide waste gas per year from Petronas’ gas processing plant in Kerteh, Terengganu.
The carbon dioxide waste gas will then be purified to produce liquid gas to be sold to the end users,
Kelington plans to invest up to RM60mil to build a carbon dioxide gas purification plant, which is anticipated to contribute revenue from the financial year 2019 (FY19).
Banking on the robust demand available for carbon dioxide, Gan is sanguine that the group’s industrial gas segment will grow substantially in future.
To put it into context, carbon dioxide gas is commonly used across a wide variety of industries, with the food and beverages sector being the largest consumer in Malaysia.
Apart from that, other industries such as oil and gas, fabrication and construction as well as pharmaceuticals, require carbon dioxide gas on a large scale.
He also indicates that the venture could potentially yield nearly RM1bil in revenue, over the gas purification plant’s lifespan of up to 25 years.
“The new venture complements our existing project-based business model of providing engineering services which are usually completed within six to 12 months.
“In the coming years, demand for liquid carbon dioxide is expected to grow further on the back of rising demand in the food and beverages industry as well as the upcoming roll-out of large infrastructure and construction projects,” says Gan.
With the new contract in hand, Kelington will add an additional 40% to the country’s industrial gas production capacity. It will also emerge as one of Malaysia’s three liquid carbon dioxide manufacturers.
Moving forward, Kelington aims to expand beyond the domestic market and to export industrial gases to neighbouring countries.
“We hope to grow big in this segment and we are likely to explore production of other types of gases at a later stage,” states Gan, adding that the company is also currently on the look-out for opportunities in Sabah and Sarawak.
In an earlier note, Rakuten Trade Research notes that the industrial gas business is an underserved segment with much potential.
Citing Kelington’s healthy balance sheet, the research house says the company will be able to expand in the capital expenditure-intensive segment going forward. It issued a “buy” call on the group.
In the first nine months of FY17 ended Sept 30 (9M17), the group’s net profit surged by nearly 86% year-on-year (y-o-y) to RM7.65mil.
The strong performance was driven by its lower provision of impairment losses on projects and receivables.
Kelington’s cost optimization efforts have led to an improvement in its 9M17 gross profit margins to 12.7%, as compared to 11% in 9M16
However, the company recorded a 9% y-o-y lower top line at RM213.35mil, as a result of a 37% decrease in its UHP division’s revenue.
This was due to the absence of revenue recognition from a major project in Singapore which has been completed.
“The outlook for the year remains optimistic as we continue to enjoy a healthy order book replenishment rate. Year-to-date, we have secured new contracts worth RM292mil. The group has an order book on hand of RM454mil, of which RM241mil remains outstanding.
“Moving forward, we remain committed in fortifying our market share across all our operating markets. China will be our key growth driver for the year of 2017 and 2018 as we leverage on the country’s capital expenditure expansion in the global semiconductor industry,” says Gan.
As at Sept 30, Kelington is in a net cash position of RM35.9mil.
In terms of share price, the counter nearly tripled in price to 71 sen over the last one year, with a current market capitalisation of RM162.3mil.