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Kelington Group Bhd KGB (0151)  recent 3Q18 results reinforces our bullish stance on the company as their industrial gas division revenue starts contributing and would be a game changer when its liquid carbon dioxide (CO2) plant is completed by 3Q19. We are upgrading our target price to RM1.38 based on 15x PER FY19 as per closest related peers' average. Since our initiation report back in 2 Oct 2017, KGB share price has doubled and so has its earnings via their industrial gas maiden contribution in its latest quarterly results. Additionally, revenue from core division Ultra High Purity business continues to be robust for 9M 18 registering 105% growth.

KGB's new contracts secured YTD stood at RM372m and is on track to surpass last year's orderbook replenishment. KGB is a prime beneficiary and proxy for China's memory chips and integrated circuits in conjunction with "Made in China 2025" policy and being insulated from US' threat of a trade tension.

KGB's growth trajectory continues to be robust anchored by their industrial gas plant (CO2) in Kerteh located next to Petronas Gas which will come onstream 3Q19 with 50,000 tonnes capacity. Currently, industrial gas revenue comes from their RM20m 10-year contract on site gas supply to one of the largest manufacturers of solar cells and modules in Cyberjaya.

KGB's balance sheet remains solid with net cash position of over RM53m. Furthermore, it has a minimum 25% dividend payout ratio translating to dividend yield of over 2%. KGB is poised to benefit from China's semiconductor expansion plans coupled with its industrial gas division which will provide sustained recurring earnings growth as we expect it to register double digit EPS growth of 31% in FY19 and 25% in FY20.

Source: Rakuten Research - 26 Nov 2018

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