KUALA LUMPUR (Sept 20): RHB Investment Bank Bhd has maintained its "Buy" rating on Kelington Group Bhd at RM1.32 with a lower discounted cash flow (DCF) based target price of RM1.58 from RM1.63 previously.

"We remain upbeat on Kelington's prospects following a recent meeting with the management," the research house said in a note today.

RHB rolled forward its DCF valuation to FY20 to better reflect the expanding contributions from the industrial gas segment.

Kelington's new liquefied carbon dioxide (LCO₂) plant, which will commence operations in late September or early October, is earnings-accretive from the outset and expected to further strengthen margins.

The research house has trimmed the FY19-21F core earnings to reflect a potentially weaker orderbook replenishment rate.

"We see significant scope for the industrial gas business to scale up, with Kelington emerging as a challenger to industry leader, Linde Malaysia," it said.

"Based on an indicative 30% gross margin, we project the LCO₂ business to contribute some 11.6% of group core earnings in FY20," it added.

RHB said the industrial gas segment (Ace Gases SB) should drive longer-term recurring revenue/earnings, as management is vying for higher-yielding on-site gas supply projects, on top of distributing and trading specialty gases.

RHB said Kelington's management highlighted the potentially weaker order book replenishment in 2H19 is due to the challenging operating environment and the slowdown in domestic projects.

It said new orders secured year to date totalled RM227 million (-4% year-on-year), with its outstanding orderbook at RM312 million as at 2Q19, 76% of which are from ultra-high purity (UHP) projects.

"As such, we think FY19 new orders are unlikely to surpass the record RM424 million achieved in FY18," RHB said.

"The impact should, nonetheless, be mitigated by higher margins derived from its Singapore UHP and process engineering (PE) jobs (53% of outstanding orderbook) and potential new renewable energy/solar projects in Taiwan," it added.

Kelington's gross margin widened to 16.8% in 1H19 from 14.5% in 1H18. With the commencement of the LCO₂ project, the group's gross margin is projected to be further strengthened.

"We lower FY19-21F core earnings by 2-7% after imputing more conservative orderbook replenishment assumptions going forward," RHB said.