September 8, 2010

KGB - Kenanga initiates coverage on Kelington with TP of RM1.04

Stock Name: KGB
Company Name: KELINGTON GROUP BERHAD
Research House: KENANGA

Kelington Group Bhd
(Sept 7, 78 sen)
Initiating coverage at 76 sen with a buy call at target price of RM1.04
: At 76 sen, Kelington is currently trading at a price-to-earnings ratio (PER) of 6.7 times for FY2010, which is higher than its initial public offering (IPO) level at 53 sen. We are fair valuing Kelington at RM1.04 based on eight times PER of its FY2011 earnings per share (EPS) of 13 sen.

Kelington is principally engaged in providing engineering services and general trading, specifically in the provision of ultra-high purity gas (UHP) and chemical delivery systems solutions which range from system design, installation, equipment, control, instrumentation, quality assurance, servicing and maintenance of foundries (semiconductor/FPD).

The group recorded a relatively stable revenue and net profit at a four-year compound annual growth rate (CAGR) of 32% and 41%, respectively. Geographically, its single largest revenue contributor is Malaysia (37%), followed by China (34%) and Taiwan (28%) as at FY2008. Its net margins of 11% are due to strong revenue contribution from China and improving project margins.

Due to its unique position as a UHP gas integrator, Kelington is riding on growing demand from China and India. Its earnings will largely depend on capex spending by wafer manufacturers, which is strongly correlated to global consumer demand and economic conditions. Its UHP delivery system works include the design, fabrication and installation as well as service and maintenance.

Since its debut, Kelington has completed Malaysia's largest wafer fabrication plant in Kulim, Kedah, by SilTerra, one of the world's largest wafer fabricators. It has also made its first successful venture abroad in Taiwan for HannStar Display, a thin film transistor liquid crystal display (TFT-LCD) manufacturer, followed by a number of orders from other reputable customers from China and Taiwan.

Its 2QFY2010 net profit of RM2.3 million was 9% higher year-on-year, coming within consensus forecast. We believe due to seasonality in the semiconductor business, Kelington's 2HFY2010 earnings will peak when more capex is spent in the wafer industry, especially in China and Taiwan.

Going forward, we are cautious on the cyclical electrical and electronics (E&E) sector due to economic uncertainties. We believe that the technology sector will take a breather in the short term as uncertainties over the global economic recovery will negatively affect consumer sentiment.

The key risks to our recommendation are potential delays in capex spending in the semiconductor industry, slower recovery in demand for wafers and LCDs and a longer-than-expected economic recovery. - Kenanga IB Research, Sept 7


This article appeared in The Edge Financial Daily, September 8 2010.


No comments:

Post a Comment