Stock Name: KGBCompany Name: KELINGTON GROUP BERHAD| Research House: JF APEX | Price Call: BUY | Target Price: 1.18 |
Investment HighlightsAn 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.
RecommendationAttractive valuation with 34% potential upside. Kelington 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.
Source: JF Apex Research - 20 April 2012
