Why I Like Kelington

Formed in 2000, Kelington is a leading provider of Ultra High Purity (UHP) gas and chemical delivery solutions in the region. The company provides a comprehensive range of services in the value chain of UHP gas and chemical delivery systems encompasses design, installation, equipment, quality assurance and maintenance. Through a listing in the ACE market, management believes it would be able to raise its profile as one of the leading UHP gas and chemical delivery solutions provider, and thus stand a higher chance of bidding for projects with established players in China and Taiwan. UHP gas and chemical delivery systems are deployed in highly specialised industries such as the flat panel display (FPD) and wafer fabrication sectors and emerging industries such as the solar energy, pharmaceutical, light-emitting diode (LED) and bioscience sectors.

From FY06 to FY08, Kelington had been registering an impressive top and bottom line growth of 40.9% and 54.1% respectively. With its strong orderbook of RM74.98m, revenue is expected to grow organically by 5.4% and 2.7% for FY09 and FY10 respectively. In strengthening its position, Kelington plans to improve its capabilities, expand its UHP gas and delivery systems, develop its overseas markets and continue to undertake various research and development activities.

Its IPO issue price was RM0.53, it has been sluggish since hitting RM0.90 on opening day and has since consolidated around RM0.60.


Commendable standing in the industry: Notable achievements

2000 Secured maiden key project in Malaysia for SilTerra Malaysia's foundary at Kulim.
2003 Implemented first project in Taiwan for HannStar Display (TFT-LCD).
2004 Implemented first major project in PRC for Taiwan Semiconductor Manufacturing Corporation (Wafer fabrication).
Manufactured first equipment (Valve Manifold Box & Vale Manifold Panel) as OEM for Taiwan.
2005 SkyWalker Group Ltd (linked to The Linde Group) became a major shareholder of the Group.
2007 Implemented first solar cell project for Suntech Power Holdings in China.
2008 Implemented first renewable energy project in Singapore for Renewable Energy Corporation.
Attained Pioneer Status (with retrospective effect from May 2007).
2009 Implemented turnkey Bulk Chemical Delivery System for Seagate Skudai, cementing its ability to undertake large-scale chemical delivery systems.

In Malaysia, Kelington has an 18% market share but less than 2% in China and Taiwan. Having said that, the China and Taiwan business accounted for 61.4% of its revenue in 2008. The fact that China and Taiwan offer tremendous growth potential is prompting management to grow its market share there. As such, the management believes it needs to secure bigger contracts to be seen as a serious player in this niche industry. This also shows that the company planned ahead and sees tremendous potential in China and Taiwan by virtue that 61.4% of its 2008 revenue came from China and Taiwan.

The company’s substantial shareholders are Palace Star (53.19%), Allied Moral (7.88%) and Sky Walker (12.88%). The current directors of Palace Star are Gan Hung Keng (27.0%), Ong Weng Leong (27.0%) and Lim Hock San (46.0%). While Lim Hock San is not directly involved in the management of the Group, Gan Hung Keng is the Chairman while Ong Weng Leong is Group Executive Director. Gan Hung Keng, with over 20 years of experience, is responsible for the Group’s strategic direction. On the other hand, Ong Weng Leong, with 17 years’ experience in the industry, is responsible for the Group’s day-to-day functions in Taiwan and China. As for Allied Moral, its shareholders are individual financial investors who are not involved in the company’s management. Sky Walker, incorporated in British Virgin Islands, is principally involved in overseas investment.

A caveat on dependence. At least 34.4% of the Group’s total revenue in FY08 came from the BOCLH group of companies (“BOCLH Group”). BOLCH is a joint venture between Lien Hwa Industrial Corporation of Taiwan and BOC Group Plc of the United Kingdom. BOLCH is also a related company of Kelington by virtue of their indirect shareholding interest in Kelington through Sky Walker, a substantial shareholder. Nevertheless, the management expects to maintain this close relationship, established since March 2003.

This being the first IPO on ACE, we note that there may be some concerns over the quality of the company as IPOs on the ACE market do not need approval from the SC but will instead be sponsor-driven. IPOs on the ACE market also do not need to meet any minimum profit track record or market capitalization to list. However, in terms of disposal of shares by vendors, the requirements of the ACE market are actually tighter than those of the Mesdaq, with a 100% moratorium on disposal of vendor shares in the first 6 months, as opposed to only a 45% moratorium in the first year for Mesdaq. The fact that Kellington has been profitable over the last 3 years and boasts a cumulative profit track record of RM13.5m and is listing to gain a higher profile among its current and potential clients, should assuage investors’ concerns. In fact, Kelington would have been a much superior candidate when compared to the majority of Mesdaq listings over the past three years. Kenanga Investment Bank Berhad was the adviser, underwriter and placement agent for Kelington's Initial Public Offering (IPO) exercise.

Comparisons with Peers (FY08)
Mkt Cap (RMm) / Revenue (RMm) / Net profit (RMm) /Gross margin (%) / ROE (%) / PER / P/B
Kelington (Malaysia) 39.6 / 60.1 / 6.6 / 20.6 / 30.6 / 6.0 / 1.8
Marketech (Taiwan) 239.9 / 1053.3 / 22.2 / 12.2 / 5.6 / 10.9 / 0.6
Hanyang Engineering (Korea) 259.4 / 603.6 / 16.7 / 6.1 / 8.4 / 16.3 / 1.3
Wholetech System Hitech (Taiwan) 115.5 / 213.4 / 0.3 / 12.6 / 0.5 / 337.1 / 1.7

Kelington compares very well in terms of gross margins, and looks very much undervalued at this point in time. Their year end is end-December, for the 3Q2009, the company made a PBT of RM3.97m, and a net profit of RM3.01m, on revenue of RM19.9m. Cumulatively for the first 9 months of 2009, the company made a net profit RM6.42m on revenue of RM44.6m.

That meant that the net EPS for 3Q2009 was an outstanding 4.63 sen, bringing the total net EPS for the 9 months this year to 9.8 sen. If you add another 4 sen for the final quarter, that would bring the net EPS for 2009 to 13.8 sen, compare that to its current share price of around RM60 sen. Highly ridiculous.


p/s photos: Nozomi Sasaki