Investment Highlights

• We increase our FY21–23F net profit forecasts by 31%, 15% and 8% respectively and raise our fair value by 7% to RM2.47 (from RM2.31) based on 18x revised FY23F EPS. We value KPower at a discount to the average forward 20x PE of leading renewable energy players globally to reflect: (1) KPower being a relatively new player in this space; and (2) its relatively small market value. No ESG-related adjustments to our fair value based on a 3-star rating as appraised by us (Exhibit 3).

• KPower’s 9MFY21 net profit came in above expectations. It already exceeded our full-year of forecast by 1% and was just 4% shy of the full-year consensus estimates. We believe the key variance against our forecast came largely from higher-than-expected profit margins realised from the construction of renewable energy power plants.

• Its 9MFY21 core net profit jumped more than 5x, driven largely by progress billings from construction jobs secured mostly in FY20 and 1HFY21, we believe particularly, a sewerage project in Kuala Lumpur (RM254.3mil), 32.5MW hydropower plant project in Perak (RM354.0mil), 22.9MW hydropower plant in Nepal (RM208.1mil) and 30MW hydropower plant in Laos (RM174.5mil).

• Our earnings upgrade is to reflect higher profit margins from the construction of renewable energy power plants.

• Meanwhile, YTD for FY21F (June), KPower has secured jobs worth a total of RM1.2bil, which is still within our annual job wins assumption of RM1.4bil for FY21–23F (vs. KPower’s guidance of RM2.0bil for FY21F). The group’s outstanding construction order book stands at about RM2.0bil.

• We continue to like KPower for: (1) the bright prospects of renewable energy, underpinned by the global trends towards clean and sustainable energy and carbon neutrality to combat climate change; and (2) its strong earnings visibility and growth potential underpinned by its RM2.2bil order backlog on green utility projects, coupled with a massive tender book of RM3.4bil.

• At about 14x fully-diluted FY23F earnings, we believe that this homegrown renewable energy player has a compelling investment case given its involvement in the green sector where the growth trajectory is just beginning.

Source: AmInvest Research - 21 May 2021