Malaysia Company Update

31 December 2021 Construction & Engineering | Industrial

Kelington Group (KGRB MK) Neutral (Maintained)

Target Price (Return): MYR1.75 (+1%)
Strong Orderbook In The Price
Price (Market Cap): MYR1.73 (USD266m)
ESG score: 2.80 (out of 4)
Avg Daily Turnover (MYR/USD) 5.45m/1.31m
 Maintain NEUTRAL, MYR1.75 TP, 1% upside with c.1% FY22F yield. Analyst
While we remain positive on Kelington’s earnings prospects – with a record-
high orderbook of over MYR1.2bn – its FY22F P/E being at +1.5SD from Jeffrey Tan
the historical 5-year mean suggests the upside is in the price. Our TP has +603 9280 8863
factored in a 4% ESG discount and implies 35x FY22F EPS, which is jeffrey.tan@rhbgroup.com
reflective of the still-buoyant outlook for the chip sector going into 2022. Key
risks: Sector-wide de-rating, stronger/weaker-than-expected order wins.
 Riding on the coattails of the global fabrication (fab) capacity
expansion. Over in Singapore, where it is the leading ultra-high purity
(USP) engineering specialist, KGB has bagged multiple contracts valued in
excess of MYR300m from Global Foundries, Micron and Siltronics Share Performance (%)
(collectively, Singapore orders made up 39% of its outstanding orderbook). YTD 1m 3m 6m 12m
Management is hopeful of securing new hook-up jobs from China’s largest Absolute 104.7 7.5 (1.7) 60.9 112.3
foundry, Semiconductor Manufacturing International Corporation
Relative 109.8 5.5 (2.1) 60.2 118.4
(SMIC), which had earlier unveiled plans for a new c.USD9bn plant in
52-wk Price low/high (MYR) 0.80 – 1.83
Shanghai. In Malaysia, the group will focus on executing the landmark
MYR420m contract in Sarawak for Western Digital (WD).
Kelington Group (KGRB MK)
 Margins set to be maintained. We expect KGB to sustain its margins, Price Close
Relative to FTSE Bursa Malaysia KLCI Index (RHS)
given management’s focus on more profitable/higher-yield contracts and 2.0 245

improving offtakes for the industrial gas segment. With the large chunk of 1.8 222
the outstanding orderbook linked to WD, general contracting (GC) works 1.6 199
now contribute about 36% of outstanding orderbook vs 57% for UHP and 1.4 176
process engineering (7%). Historically, the higher-margin UHP segment
1.2 154
contributed c.70% of its orderbook. Management has maintained the
1.0 131
guidance for GP and NP margins at c.15% and c.5%.
0.8 108

 Looking at other specialty gases. KGB has obtained halal certification 0.6 85
May-21
May-21
Apr-21
Apr-21

Oct-21
Oct-21
Jan-21
Feb-21
Feb-21

Jun-21
Dec-20

Nov-21
Dec-21
Dec-21
Mar-21
Mar-21

Jul-21
Jul-21
Aug-21
Aug-21
Sep-21
Sep-21
from the Department of Islamic Development Malaysia (JAKIM). While it is
a pre-requisite to venture into the lucrative F&B segment, the expansion
would be managed carefully so as not to trigger a competitive response Source: Bloomberg
from the industry leader (Linde Malaysia). Its liquid carbon dioxide (LCO2)
plant utilisation rate rose to 60% (50,000 tonnes pa capacity) in 3Q21 from
<50% in 1H21, with the opening up of economic activities under the National
Recovery Plan. We expect the utilisation rate to reach 80% in FY22 on
stronger export orders. Management is eyeing other specialty gases and
will be adding more skid tanks for the transportation of LCO2 to Singapore.
 …and LCO2 for durian freezing. A new and potentially lucrative segment Overall ESG Score: 2.80 (out of 4)
being explored is the freezing of durians for the export market using LCO 2 E: GOOD
which appears to be a more efficient alternative to liquid nitrogen. Frozen KGB is committed to preserving the environment through
durians is a key component of Malaysian exports, with 30,000 tonnes of various practices such as reducing electricity and water
consumption. It is also managing the usage of materials to
durian valued at MYR74.1m exported in FY20. reduce waste. There is, however, a lack of environmental
statistics on pollution and waste management
S: GOOD
Apart from up-to-standard health & safety policies, we see
active community engagements, and efforts to uplift
Forecasts and Valuation Dec-19 Dec-20 Dec-21F Dec-22F Dec-23F employee relations. KGB is focused on attracting and
Total turnover (MYRm) 380 395 493 751 644 retaining talent, and helping employees develop their skills
Recurring net profit (MYRm) 23 22 33 45 42
to drive further success
G: GOOD
Recurring net profit growth (%) 20.3 (5.8) 49.0 36.4 (7.3) KGB's chairman is also its Group CEO. The Board does not
Recurring P/E (x) 63.57 67.45 45.27 33.18 35.81 utilise independent sources to identify the appointment of
P/B (x) 9.6 8.9 7.8 6.6 5.8 directors, which could limit operational checks and
balances. A third-party investor relations unit facilitates
P/CF (x) 70.44 32.51 58.20 36.53 30.64
communication with the investment community, with
Dividend Yield (%) 0.8 0.9 0.6 0.8 0.7 periodic meetings convened
EV/EBITDA (x) 38.86 42.07 30.26 21.97 23.44
Note:
Return on average equity (%) 18.0 10.8 18.3 21.6 17.3 Small cap stocks are defined as companies with a market
Net debt to equity (%) net cash net cash net cash net cash net cash capitalization of less than USD0.5bn.
Source: Company data, RHB

See important disclosures at the end of this report

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Kelington Group Malaysia Company Update
31 December 2021 Construction & Engineering | Industrial

Financial Exhibits
Asia Financial summary (MYR) Dec-19 Dec-20 Dec-21F Dec-22F Dec-23F
Malaysia Recurring EPS 0.03 0.03 0.04 0.05 0.05
Construction & Engineering DPS 0.01 0.02 0.01 0.01 0.01
Kelington Group BVPS 0.18 0.20 0.22 0.26 0.30
KGRB MK Return on average equity (%) 18.0 10.8 18.3 21.6 17.3
Neutral
Valuation metrics Dec-19 Dec-20 Dec-21F Dec-22F Dec-23F
Valuation basis Recurring P/E (x) 63.57 67.45 45.27 33.18 35.81
DCF (WACC: 7.5%, TG: 1.5%) P/B (x) 9.6 8.9 7.8 6.6 5.8
FCF Yield (%) (0.8) 2.3 1.4 2.4 2.9
Key drivers Dividend Yield (%) 0.8 0.9 0.6 0.8 0.7

i. Stellar growth of the semiconductor industry in EV/EBITDA (x) 38.86 42.07 30.26 21.97 23.44
ii. China; EV/EBIT (x) 42.36 49.67 32.95 23.41 25.17
iii. Growing outstanding orderbook;
iv. New LCO2 business. Income statement (MYRm) Dec-19 Dec-20 Dec-21F Dec-22F Dec-23F
Total turnover 380 395 493 751 644
Key risks Gross profit 64 59 82 122 107
Key downside risks: EBITDA 37 34 46 62 57
i. A sector valuation de-rating; Depreciation and amortisation (3) (5) (4) (4) (4)
ii. Weaker-than-expected earnings and margins;
Operating profit 34 28 42 58 53
iii. Slower-than-expected orderbook replenishment.
Net interest (1) (2) (3) (2) (1)
Company Profile Pre-tax profit 32 21 39 56 52

Kelington is involved in ultra-high purity (UHP) delivery Taxation (8) (3) (6) (11) (10)
systems, process engineering and general contracting. Reported net profit 24 17 33 45 42
The company commenced maiden production of liquid Recurring net profit 23 22 33 45 42
carbon dioxide (LCO2) in 4Q19.
Cash flow (MYRm) Dec-19 Dec-20 Dec-21F Dec-22F Dec-23F
Change in working capital (8.5) 18.3 (11.2) (8.0) 3.0
Cash flow from operations 21.1 45.7 25.6 40.7 48.5
Capex (33.5) (11.2) (5.0) (5.0) (5.0)
Cash flow from investing activities (35.2) (12.0) (6.0) (5.0) (5.0)
Dividends paid (8.1) (4.8) 0.0 (8.2) (11.2)
Cash flow from financing activities 32.8 11.7 0.0 (33.2) (36.2)
Cash at beginning of period 67.1 85.2 132.0 150.8 153.3
Net change in cash 18.7 45.4 19.5 2.5 7.3
Ending balance cash 85.1 131.4 151.5 153.3 160.7

Balance sheet (MYRm) Dec-19 Dec-20 Dec-21F Dec-22F Dec-23F

Total cash and equivalents 85 132 151 153 161
Tangible fixed assets 53 60 61 62 63
Total assets 305 350 388 442 430
Short-term debt 12 28 28 3 3
Total long-term debt 23 27 27 27 2
Total liabilities 149 182 197 217 174
Total equity 156 168 191 225 256
Total liabilities & equity 305 350 388 442 430

Key metrics Dec-19 Dec-20 Dec-21F Dec-22F Dec-23F

Revenue growth (%) 8.5 3.9 24.8 52.5 (14.3)
Recurrent EPS growth (%) 20.3 (5.8) 49.0 36.4 (7.3)
Gross margin (%) 16.7 14.9 16.7 16.2 16.6
Operating EBITDA margin (%) 9.7 8.5 9.3 8.3 8.8
Net profit margin (%) 6.4 4.4 6.7 6.0 6.4
Dividend payout ratio (%) 47.6 73.7 25.0 25.0 25.0
Capex/sales (%) 8.8 2.8 1.0 0.7 0.8
Interest cover (x) 25.9 11.5 14.0 27.1 59.0

Source: Company data, RHB

See important disclosures at the end of this report

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Kelington Group Malaysia Company Update
31 December 2021 Construction & Engineering | Industrial

Recommendation Chart
Date Recommendation Target Price Price
Price Close
2021-12-01 Neutral 1.75 1.62
2.0 Recommendations & Target Price
2021-10-07 Neutral 1.76 1.77
na

1.06

1.41

1.52

1.63

1.58
1.55

1.45

1.16

1.14

1.55
2.00
2.11

2.02

1.16
1.76
1.75
1.8
2021-09-15 Neutral 1.45 1.66
1.6

1.43

1.01

1.62

1.83

1.45
2021-08-25 Neutral 1.16 1.27
1.4

1.32

1.83
2021-06-15 Neutral 2.02 1.10
1.2
2021-03-16 Neutral 1.83 0.98
1.0
2021-03-05 Sell 1.83 0.95
0.8
2021-03-01 Sell 2.11 1.15
0.6
2021-01-20 Neutral 2.00 1.15
0.4
2020-11-25 Neutral 1.62 0.88
0.2
Buy Neutral Sell Trading Buy Take Profit Not Rated 2020-11-17 Neutral 1.55 0.82
0.0
Dec-16 Apr-18 Jul-19 Oct-20 2020-08-13 Neutral 1.14 0.55
2020-06-05 Neutral 1.01 0.49
Source: RHB, Bloomberg
2020-05-19 Neutral 1.16 0.57
2020-03-13 Buy 1.32 0.48

Source: RHB, Bloomberg

ESG Rating History

4.0

3.0
2.8 2.8 2.8 2.8 2.8

2.0

1.0

0.0

Source: RHB

See important disclosures at the end of this report

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While the RHBIB Group will ensure that there are sufficient information barriers and and have not within the last 12 months had any corporate finance advisory
internal controls in place where necessary, to prevent/manage any conflicts of interest relationship with the issuer covered by the Singapore research analysts in this
to ensure the independence of this report, investors should also be aware that such report or any other relationship that may create a potential conflict of interest.
conflict of interest may exist in view of the investment banking activities undertaken by 5. RHB Bank Berhad’s Singapore research analysts, or person associated or
the RHBIB Group as mentioned above and should exercise their own judgement connected to it do not have any interest in the acquisition or disposal of, the
before making any investment decisions. securities, specified securities based derivatives contracts or units in a collective
investment scheme covered by the Singapore research analysts in this report.
In Singapore, investment research activities are conducted under RHB Bank Berhad 6. RHB Bank Berhad’s Singapore research analysts do not receive any
(through its Singapore branch), and the disclaimers above similarly apply. compensation or benefit in connection with the production of this research report
or recommendation on the issuer covered by the Singapore research analysts.
Malaysia
Save as disclosed in the following link RHB Research conflict disclosures – Dec 2021 Analyst Certification
and to the best of our knowledge, RHBIB hereby declares that: The analyst(s) who prepared this report, and their associates hereby, certify that:

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(1) they do not have any financial interest in the securities or other capital market
products of the subject companies mentioned in this report, except for:

Analyst Company
- -

(2) no part of his or her compensation was, is or will be directly or indirectly related to
the specific recommendations or views expressed in this report.

KUALA LUMPUR JAKARTA

RHB Investment Bank Bhd PT RHB Sekuritas Indonesia
Level 3A, Tower One, RHB Centre Revenue Tower, 11th Floor, District 8 - SCBD
Jalan Tun Razak Jl. Jendral Sudirman Kav 52-53
Kuala Lumpur 50400 Jakarta 12190
Malaysia Indonesia
Tel : +603 9280 8888 Tel : +6221 509 39 888
Fax : +603 9200 2216 Fax : +6221 509 39 777

BANGKOK SINGAPORE
RHB Securities (Thailand) PCL RHB Bank Berhad (Singapore branch)
10th Floor, Sathorn Square Office Tower 90 Cecil Street
98, North Sathorn Road, Silom #04-00 RHB Bank Building
Bangrak, Bangkok 10500 Singapore 069531
Thailand Fax: +65 6509 0470
Tel: +66 2088 9999
Fax :+66 2088 9799

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