RHB Research retains buy on Kelington, new TP RM1.58

  • Analyst Reports
  • Friday, 20 Sep 2019

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KUALA LUMPUR: RHB Research maintained its buy call on construction and engineering company Kelington Group with a new discounted cashflow-based target price of RM1.58 from RM1.63.

It said on Friday it remained upbeat on Kelington’s prospects following a recent meeting with management.

“We trim FY19-21F core earnings to reflect a potentially weaker orderbook replenishment rate. Its new liquefied carbon dioxide (LCO2) plant to be commissioned by October, is earnings-accretive from the outset and expected to further strengthen margins.

“We roll forward our DCF valuation to FY20 to better reflect the expanding contributions from the industrial gas segment,” it said.

RHB Research said Kelington management expects LCO2 production to commence in late September or early October, which is slightly behind schedule.

With 30% of the initial production off-take committed to by customers, the LCO2 plant is expected to be earnings-accretive from the outset. Kelington intends to progressively ramp up production over the next four years, with the plant’s rated capacity at 50,000 tonnes.

“We see significant scope for the industrial gas business to scale up, with Kelington emerging as a challenger to industry leader, Linde Malaysia. Based on an indicative 30% gross margin, we project the LCO2 business to contribute some 11.6% of group core earnings in FY20,” it said.

The research house said Kelington’s industrial gas segment (Ace Gases Sdn Bhd) should drive longer-term recurring revenue/earnings, with management vying for higher-yielding onsite gas supply projects, on top of distributing and trading of specialty gases.

“New orders secured YTD totalled MYR227m (-4% YoY), with its outstanding orderbook at RM312mil as at 2Q19 (76% from ultra-high purity (UHP) projects). Management highlighted the potentially weaker orderbook replenishment in 2H19 due to the challenging operating environment and the slowdown in domestic projects.

“As such, we think FY19 new orders are unlikely to surpass the record RM424mil achieved in FY18. The impact should, nonetheless, be mitigated by higher margins derived from its Singapore UHP and process engineering (PE) jobs (53% of outstanding orderbook) and potential new renewable energy/solar projects in Taiwan.

“Revenue contributions from Singapore overtook China’s in 3Q18, and comprised c.40% of 2Q19 revenue (FY18: 32%). Kelington’s gross margin widened to 16.8% in 1H19 from 14.5% in 1H18, and is projected to further strengthen with the commencement of the LCO2 business.

“We lower FY19-21F core earnings by 2%-7% after imputing more conservative orderbook replenishment assumptions going forward.

“Our DCF-derived TP is adjusted to RM1.58 from RM1.63, after rolling forward our base year to FY20. Key risks are slower-than-expected orderbook replenishment, margin weakness, and management execution,” RHB Research said.

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