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I am writing here to express my opinion. Neither a recommendation nor cornering the stock!

I know you would say I am crazy because the share price of Kelington has already ran-up. Believe me, there is still more upside. The rally is not over yet.

You look at Frontken. Keep running and remains at where it is now because the story of Semiconductor is always at blue sky.
For Kelington, my feeling is even more convinced as this stock could record multi-year earnings growth.

Kelington basically designs, constructs and supplies Ultra High Purity gasses and chemicals for semiconductor sector. What I like more about the Company is its major clients are mostly wide of reputable semicon front-end players like TSMC, Global Foundries, Micron, SMIC - too many to list and its market covers China, Taiwan and Singapore.

Kelington is now being direct beneficiary of China’s semiconductor boom. Why China is on the rise?

China is in trade war with U.S. and the players in China now facing hard times to get chips from the U.S. Pursuant to that, China government has decided to build its own semiconductor industry similar to the U.S. semiconductor industry. You can check “made in China 2025” for more info. Therefore, more fabs for chip production will be built and millions of chips will be produced. Kelington’s role is vital in chips production process. So, Kelington is benefitting most from this booming industry.

In 1H18, UHP revenues jumped 2.5X driven by a 4X jump from China.

The management is very upbeat about its prospects in China as the govt there is making a big push in building out its chips industry in order to reduce its reliance on US/Korea.

Admittedly, Kelington is a small player in a big pond but because demand is so strong, mgmt now has the luxury of handpicking which jobs they want to onboard and Management is looking to 2x its workforce in China as a result.

Remember Malaysia Oxygen? For those of us who are old enough to remember, MOX was a solid company which was privatised in 2010.

Additional catalyst - They also supplied CO2 to F&B companies to make soft drinks. The founder of Kelington was the Head Engineer at MOX before he started this company in 2000.

Now, the Group intends to manufacture and start selling CO2 from 3Q19 onwards. This business is very scalable and will disrupt MOX’s current monopoly in this space. Of course they will be starting small first.

Margins are set to expand Kelington’s current GP/NP margin is about 15%/5% respectively but once the CO2 business kicks in from 3Q19 onwards, we can expect a step up in margins as the CO2 biz commands much higher margins of 30%/15% respectively.

How will managment fund the CO2 expansion? Capex requirement is RM30-40mil and mgmt. recently carried out at RM18mil placement (@RM0.78/share) placed out to insti funds to finance the expansion. 

Room for stock to re-rate.

Stock currently trades at 14X FY18 annualised P/E against >30% growth and if not mistaken, MOX was privatised at >20X.

Meanwhile, global industrial gas peers trade at 21X based on the comps table shared by mgmt while its closest MY comp ie SIG Gas trades at 33X and MY tech sector trades at 23X.

Mkt cap of c.RM250mil could be a limitation to most but stock is still in a discovery process and Rakuten is the only one on the street covers the stock. If we take its EPS of 8.75sen in FY19, it translates into P/E of 11.4X only.

While Hong Leong just upgraded Frontken P/E to 20X, why not peg this P/E to Kelington as a base case? Both of them share similar clients and in fact, Kelington has covered even wider front-end clients. The targeted P/E is also slightly cheaper than abovementioned P/E traded. So, the P/E is fair to me.

The P/E would valued Kelington at RM1.75.

I also like the fact that stock is Shariah compliant.

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