Kelington rides on semiconductor upcycle

Kelington Yap qtcht

AMIDST the coronavirus-induced market sell-off in 2020, local semiconductor stocks shone on the back of robust demand for chips as lockdowns and travel restrictions prompted consumers to buy more smartphones and electronic devices.

Analysts expect prospects for the sector, which saw sales rising more than a quarter over a year to US$43.6bil (RM184.19bil) in May, to remain healthy as the push towards digitalisation and the adoption of new technologies continue to support chip demand.

One stock in the value chain that has also been riding the semiconductor growth wave is Kelington Group Bhd – a company that provides ultra-high purity (UHP) gas delivery solutions for the electronics and semiconductor industry.

Gas delivery systems are used to safely reduce gas pressure from higher pressure cylinders to supply process tools and various instruments in a semiconductor facility.

Besides UHP, Kelington is also involved in process engineering (PE). About two years ago, it ventured into the industrial and specialty gases business, a segment its management believes could morph into a solid earnings driver going forward.

Kelington instals pipingKelington instals piping

As the chip industry cranks up investments to meet demand, Kelington’s order book replenishment has been good, with the value of new orders hitting a record high of RM490mil in the financial year ending Dec 31, 2020 (FY20).

“Up till July 2021, the group has secured new orders amounting to RM195mil, and this has raised our current outstanding order book to RM454mil across our operating markets in Malaysia, Singapore, China and Taiwan,” chief executive officer Raymond Gan Hung Keng tells StarBizWeek. He says the company will focus on executing these jobs and recognition of progress billings will contribute positively to its financial performance in 2021, which kicked off to a good start with net profit rising more than one-third year-on-year (y-o-y) to RM5.54mil in the first quarter (Q1).

Revenue, meanwhile, increased 24% y-o-y as the company’s operations in Malaysia doubled, while the China side grew 47%.

“Our operations in China and Singapore are operating at full scale without any Covid-19-related restrictions. Locally, we remain operational despite the ongoing movement control order as our operations are deemed essential, albeit with slower progress.

“Nevertheless, with the acceleration of the vaccination programme, we anticipate the operating landscape will continue to improve,” he adds.

Given its track record, Gan is confident Kelington would be able to bag more projects in the second half of the year, especially from its repeat customers, which include wafer fabricators such as Semiconductor Manufacturing International Corp of China, Taiwan Semiconductor Manufacturing Co, Infineon, Seagate, and Micron in Singapore.

“We are tendering for projects amounting to about RM1bil, of which the majority are for the UHP and PE segments,” he says, adding that barring any further lockdowns or unforeseen circumstances, the company targets to deliver a strong growth in terms of earnings in FY21.

“As we know, the world is currently facing a massive shortage in semiconductor chips. To reduce the lead time in delivering products to the customers, semiconductor firms around the world – ranging from foundries to assembly and packaging companies – are ramping up their expansion plans to capitalise on the semiconductor boom.

“As new semiconductor wafer foundries are being built and capacities expanded, demand for UHP engineering projects will also rise,” he says.

In particular, Gan notes that the trend is more apparent in China where UHP projects from that country represent the majority of the company’s outstanding orderbook.

He expects “the momentum to persist in the foreseeable future” as China ramps up its semiconductor investments following export restrictions on chips from the United States.

“Kelington has benefited from these expansion activities and secured projects from numerous semiconductor wafer foundries in recent years.

“Going forward, we are well-positioned to capitalise on the enlarged investments in the Chinese semiconductor industry to bring our performance to new heights,” Gan adds.

While UHP remains the key earnings driver, the company is also growing its other segments in line with its goal of having a robust revenue portfolio.

“Under our engineering services, we have successfully secured projects from clients in the oil and gas as well as oleochemical industries.

“As for the industrial gases business, we see huge potential ahead where our goal is for the segment to contribute one-third of total revenue in the next three to five years,” he says.

Sharing more, he points out that the utilisation rate at the company’s liquid carbon dioxide (LCO2) plant, which began operating in October 2019, had reached 60% in Q1 of FY21 versus 40% in FY20.

This was due to a surge in demand for LCO2 from neighbouring countries for use in various applications from food preservation and carbonated drinks to industrial use, such as welding and oil recovery.

As a result, revenue from the industrial gases division recorded robust growth, up 176% y-o-y from RM8mil in FY19 to RM22.1mil in FY20.

For Q1 of FY21, revenue for this segment stood at RM8.8mil, which was an increase of 73% y-o-y or 28% quarter-on-quarter.

Locally, Kelington is in the final stage of obtaining a halal certification from the Department of Islamic Development Malaysia or Jakim after having gone through all the necessary steps and processes. This will qualify it to supply LCO2 to the food and beverage industry, which is the largest consumer of LCO2.

In the near term, the plan is to focus on existing markets where it believes there are “still ample opportunities to be developed and reaped.”

“Nonetheless, our technical capabilities and track record in serving big names in the industry have readied us to take a step forward and venture into other unexplored regions. Should opportunities arise on this front, we plan to capitalise on them,” he adds.

Kelington shares closed 6 sen up to RM1.22 yesterday, giving the stock a market cap of RM787mil.

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