Kellington Group

by mabs Fri 20 Apr 2012, 11:59

Kelington Group- Investment Highlights

An undiscovered gem with growth potential.
We like Kelington because it is a leading provider of Ultra High Purity
(UPH) gas and chemical delivery solutions in the region with its niche
business model that is not well represented in any of the companies
listed in Bursa Malaysia. Its impressive future earnings growth and
aggressive overseas expansion also deserve investors’ attention.

UHP industry benefiting from shorter tech life cycles,
which necessitate reinvestments in key sectors like wafer fabrication
(planting circuit) and FPD fabrication (glass substrates). Rapid changes
in manufacturing technologies and unabated demand for innovative
consumer electronics, i.e. widespread use and continuous innovation of
wireless and portable communication devices, and increased demand in LCD
TV continue to render more projects for the Group.

Commendable earnings growth.
Kelington has successfully achieved revenue and net earnings CAGR of
40.4% and 31.7% respectively over the past 7 years. Moving forward, we
forecast the Group will chalk up RM11.1m net profit in 2012 (up 28% yoy)
on the back of RM170m revenue (consisting of outstanding orderbook of
RM54m, contributions from newly acquired Singaporean company named
Puritec and new job secure worth RM100m p.a.) and continue its strong
earnings momentum with net profit of RM13.3m (up 19% yoy) in 2013 on the
back of RM195m revenue. The company is currently tendering for
contracts worth RM400m including Infineon’s second fabrication facility
in Kulim and a solar project in China. Historically, Kelington has a
success rate of 25%.

Margin expected to stabilised.
The Group’s historical gross margin shown a downtrend from the peak of
25% in 2009 to 14.9% in 2011 as a result of stiff competition in China
and Taiwan whereby margin sacrificed to capture the market share.
However, the Group believes that gross margin is able to sustain at
current level of 15% in 2012-13.

Established firm foothold in Singapore.
Kelington started a small office two years ago in Singapore to
penetrate a range of clientele from high-tech industries such as solar
cell to the wafer fabrication. Lat year, the Group successfully secured a
RM23m project in bioscience segment to install a process mechanical
system for International Flavours & Fragrances (IFF), a leading
creator and manufacturer of flavours and fragrance. Going forward, we
believe that Singapore market could land the Group for more projects as
Singapore is currently having 16 wafer fabrication plants as compared to
only 4 wafer fabrication plants in Malaysia.

Expansion into other scope of services in existing and new countries.
The Group intends to broaden scope beyond UHP gas and chemical into
other utilities such as water, exhaust and vacuum. Furthermore, it plans
to penetrate deeper into new and existing sectors in Taiwan, China
(particularly in northern and southern areas) as there is huge potential
in emerging markets in areas such as solar energy, LED and bioscience.
On new markets, the company has started its first project in Vietnam and
is eyeing opportunities in India, Indonesia, the Philippines and Middle
East

More M&A in the pipeline.
We understand that the Group is also exploring M&A for synergistic
opportunities to expand range of services and client base. To recap, the
Group successfully acquired a Singaporean company named Puritec last
year which started to contribute to its earnings this year.

Bonus issue to enhance stock’s liquidity?
Kelington is a small cap stock that having RM73m market cap with
relatively low public float of 27%. The management has hinted a possible
bonus issue to improve the market liquidity in future with its healthy
reserves position of RM42.5m as of Dec 2011.

Strategic shareholders.
Among Kelington’s major shareholders are Lembaga Tabung Angkatan
Tentera (LTAT) with 12.6% and Sky Walker Group Ltd (12.2%), which is a
consortium of key global semiconductor players.

Dividend policy.
The Group introduced a dividend policy of 25% payout or 2.75 sen in
2011, which is equivalent to dividend yield of 3%, to attract more
institutional investors’ interests in future. We estimate that the Group
will propose a decent dividend yield of 4-5% for 2012-13.

Recommendation

Attractive valuation with 34% potential upside.
Kelington (Not Rated) is currently trades at 6.3x 2012F PER and 5.2x
2013F PER, which is based on our 2012 EPS of 14.0. sen/share and 2013
EPS of 16.8 sen/share. Our target price for the stock is at RM1.18,
pegged at 7x 2013F PE, in line with small cap valuation.

by **sun** Fri 20 Apr 2012, 12:00

by mabs Fri 20 Apr 2012, 14:31

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