We were at Kelington’s analyst briefing yesterday where the company’s
management was eager, and at pain as well (given the current negative sentiment
on the tech sector and any tech-job related companies), to explain that the
company’s projects are actually quite diversified and thus should be able to
withstand the current softness in the global economy. Management guided that 2HFY12
would be better than 1HFY12 as the latter is normally affected by the winter
and festive seasons. We share management’s upbeat view on the strength of the
compan’s niche business, although we are only cautiously optimistic as the
typical duration of its projects of around six months only does limit the long
term visibility of its earnings. We have tweaked our FY13E earnings higher to
RM10.5m (from RM9.4m previously), while introducing FY14E earnings at RM11.1m
to reflect a higher win rate on its current tender book of RM400m. Accordingly,
our Target Price (TP) has also been raised to RM0.53 (RM0.47 previously) based
on an unchanged 8.0X forward PER pegged to its higher FY13E EPS of 6.57 sen. In
line with our earnings upgrade above, we have raised our rating on Kelington to
a MARKET PERFORM (from UNDERPERFORM) given the potential 8% upside (capital
gain of 2.9% and dividend yield of 5.1%) of the shareprice to our new TP.
Diversification
strength, niche premium. The main reason underpinning management’s optimism
is that the group is actually a specialised engineering service provider in
Ultra High Purity Gas for various niche industries and sectors (such as
semiconductors, electronics, solar, etc.) and in different countries, which
thus minimise the risk of a weakness or fallout in any one of them impacting
the company’s earnings too much. For example, its lower-margin projects in
China and Taiwan are being offset by the higher margins of its Malaysia and
Singapore’s projects. In addition, Kelington is breaking into new markets all
the time (which reinforces its diversification advantage again above), with its
latest new markets, Bioscience and Wind Turbine making up already about RM181m
of its total current tender book of RM400m.
2HFY12 to be
stronger. Kelington’s 1HFY12 result was lower, but this was due to
seasonality factors only. Normally, the 1H of the year contributes a lower revenue
(30%-40%) compared to the 2H (60%-70%) due to the winter and festive seasons in
the 1H. In addition to that, the 1HFY12 result was affected by the delay in one
of its projects from Infineon Malaysia (a Germany-based company) due to the
Eurozone crisis. However, management informs that the project will kick off
soon in the next few months, which will boost FY13 earnings.
Tender book is promising.
The group is currently tendering for jobs from well-known MNC and new markets
with a worth of RM400m. The win rate historically has been around 20%-25%, with
the projects secured usually lasting 3-6 months. Traditionally, the group has
provided its engineering services to LCD and Wafer plants. For instance, the
group is tendering for Samsung China’s LCD plant job worth RM6m and Infineon
Malaysia’s wafer plant job worth RM40m. However, the group had and will
continue its strategy of expanding into new markets such as Bioscience and Wind
Turbine market. We are encouraged by this as it will help to diversify further
the company’s earnings risk. We have assumed tender book amounts of RM400m
yearly for FY13-FY14 with a win rate of 20%. At this rate, we expect Kelington
to maintain FY13E-FY14E earnings growth rates of 8% per annum, justifying our
8.0x PER valuation (PEG ratio of 1.0x).
Source: Kenanga
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