Kelington to reap the benefits of a diversified business strategy
KELINGTON Group Bhd is poised to ride the tailwinds of an anticipated semiconductor recovery in 2024 and it is also positioned to continue reaping the benefits of its well-diversified business strategy.
A one-stop facility solution provider of turnkey engineering services from the initial design phase to fabrication and maintenance services, it operates under four core business divisions, namely ultra-high purity (UHP), process engineering, general contracting, and industrial gases.
The group has a strong foothold in Malaysia, China and also Singapore. However, its geographical footprint stretches further to include Australia, the Philippines, Indonesia, Fiji, and New
Zealand. Yet, its expansion ambitions do not end there, with plans underway to include Hong Kong and Germany in its portfolio.
Speaking to Starbizweek, group chief executive officer Raymond Gan says the company’s focus in its venture to Hong Kong will lean towards new plants involved in semiconductor research and development (R&D).
On the other hand, its foray into Germany represents a strategic entry point to penetrate the European Union market.
“The nature of the R&D carried out on semiconductors in Hong Kong will be broad, encompassing various areas such as artificial intelligence (AI) chips and beyond.
“We are not targeting any particular segment in Germany. Be it foundry chips, electric vehicle (EV) and power chips for automotive applications or memory chips, our services remain the same,” he says.
Through its venture into Hong Kong and Germany, Gan hopes that Kelington can capitalise on the bullish semiconductor markets there.
“The booming demand for AI chips bodes well for us. There will be new plants and facilities set up to tailor specifically for AI chip production. Hence, this means that there is another sub-industry within the semiconductor sector that we can serve,” he says.
To support its expansion into both markets, it has incorporated Kelington Engineering (Germany) Gmbh and Kelington Engineering (HK) Ltd as indirect wholly-owned subsidiaries. The companies have been incorporated and the company is participating in tenders and project bidding.
Gan reveals that Kelington is tendering for a job related to automotive power chips in Germany, signalling a good start to its overseas venture.
“We were invited to quote a tender by one of our existing clients in Malaysia and were asked to establish a presence in Germany as there is a shortage of UHP contractors there,” he says.
Apart from using the incorporated companies to tender for projects, the group also has plans to work with existing contractors or companies in Germany to secure contracts.
“This approach helps to minimise our exposure to regulatory risks and ensures compliance with local requirements. While we do not plan to pursue joint ventures, we are open to collaborating with existing companies there as subcontractors.
“Moreover, we are also open to mergers and acquisitions (M&A) if it can strengthen our presence in Germany. At present, we do not have any specific M&A targets yet,” Gan says.
Kelington maintains resilient earnings visibility with an outstanding order book of Rm1.3bil as at Dec 31, 2023. This substantial order book enables the company to effectively buffer against the cyclical nature of the semiconductor sector.
Of the Rm1.3bil, the UHP segment accounts for over 70%, totaling Rm967mil, of the outstanding order book.
Additionally, Kelington’s outstanding order book is evenly distributed across geographical markets, with contributions from Malaysia at 35%, Singapore at 33%, China at 31%, and Taiwan at 1%.
In the last two to three years, its order book has been averaging at around Rm1.2bil, and the group intends to maintain those levels going forward.
Group chief operating officer Ong Weng Leong says the group’s total tender book stands at Rm1.9bil across its key markets.
With the market still hot, Ong anticipates a continued abundance of tender opportunities.
“For the UHP segment, our growth strategy encompasses both organic expansion from our existing business in China, Taiwan, Malaysia and Singapore, as well as geographical expansion as evident by our foray into Hong Kong and Germany,” he says.
Looking ahead, the next two to three years are anticipated to be a semiconductor upcycle, with 2024 serving as the recovery year, followed by a peak in 2025 and sustained strength in 2026.
Hence, Ong says this is expected to increase opportunities for growth, with more new tenders for its UHP segment.
“On the industrial gases segment , liquid carbon dioxide (LCO2) remains as our main offering and we export over 70% to Australia, New Zealand, Fiji, Indonesia, Vietnam and the Philippines.
“Due to its smaller base compared to the engineering business, the industrial gases sector is poised for higher growth rates, potentially reaching 40% to 50% in terms of bottom line growth. In contrast, for the UHP or engineering segment we are targeting a double-digit growth for the bottom line,” he says.
Ong notes the gross profit margin for KGB’S engineering services is around 15%, while it is about 30% for the industrial gases segment.
“Both sectors have their advantages and disadvantages. UHP projects, despite having lower margins, generate cash quickly as the project duration is usually six to nine months with minimal capital expenditure.
“On the other hand, industrial gases projects yield higher margins but require significant capital expenditure, and returns are realised over a longer period.
“However, the income from industrial gases projects is recurring,” he says.
Ong adds that Kelington drives value creation by allocating the cash generated from its engineering business, particularly UHP, to fund its industrial gases segment.
Kelington has recently commenced operations at its new LCO2 plant in Kerteh, Terengganu, that has a capacity of 70,000 tonnes per year.
This brings the company’s production capacity of LCO2 to 120,000 tonnes per year.
The group’s first LCO2 plant has reached a 100%-capacity utilisation rate and the second plant is expected to ease the bottleneck in the first plant.
“We expect the shortage of LCO2 in Asia and Oceania countries to persist. Over the next two to three years, our primary focus will be on ramping up the capacity of our second plant.
“Once we reach approximately 90% of total capacity utilisation, we will consider the construction of a third plant.
“We have recently acquired a parcel of vacant land from the Terengganu state government that is adjacent to our first LCO2 plant.
“The land provides the space for the potential construction of two additional LCO2 plants if the need arises.
“Regarding plant construction, it is unlikely that there will be any new ones to be commissioned this year.
“Construction typically takes about 12 months, so even if we secure projects this year, the commencement of operations will likely be next year rather than this year,” Ong says.
He also does not rule out the possibility of acquiring a LCO2 plant overseas particularly, Indonesia. However, the decision to venture out of the country or remain will depend on the market.
“Indonesia is a very big market for LCO2 because LCO2 demand is mainly proportional to the population, because it is for food and beverage.
“If there is a need to cater for more demand in Indonesia, we will not rule out the possibility of acquiring an LCO2 plant there. We are exploring this actually,” he says.
The group maintains a dividend policy to allocate a minimum of 25% of its profit after tax and minority interest to shareholders.
“Should there be no major capital expenditure in place this year, we may declare higher dividends in the coming quarters,” Ong says.
Kelington’s net profit rose 84% to Rm102.65mil for the financial year ended Dec 31, 2023, from Rm55.75mil in the preceding year.
Consequently, its earnings per share increased to 15.94 sen from 8.67 sen. The higher earnings were in tandem with the 26% growth in its revenue to Rm133mil last year from Rm74.39mil in 2022.
The group declared a total dividend of four sen per share for 2023, up from 2.5 sen per share in 2022.