KEY INVESTMENT HIGHLIGHTS

• Received a LOA for Annual Supply and Delivery of Steel Poles

• KKB’s contract replenishment YTD stands at RM285m

• Duration of the contract is approximately 1 year

• No changes to our earnings estimates

• Upgrade to BUY from NEUTRAL due to recent price weakness with unchanged TP of RM1.90

Based on Bursa Announcement dated 20th April 2020, KKB has received a Letter of Award (LOA) for Annual Supply and Delivery of Steel Poles from Sarawak Energy Berhad. The contract carries a value worth RM15m. This is the third contract clinched by KKB this year - after the two contracts from Petronas Carigali Sdn Bhd and PTTEP Sarawak Oil Limited earlier this year amounted to RM270m.

KKB’s contract replenishment year-to-date (TYD) stands at RM285m. This is an improvement from 2019 as KKB’s YTD replenishment amounted to only RM110.8m until mid-April last year. Moreover, we note that the Group’s order and tender books stood at RM820m and RM240m respectively as of end of February this year. The new RM15m contract award expands its order book to RM835m.

Duration of contract. The contract duration for the supply and delivery of steel poles is approximately 1 year.

Downside risk. Among the risks that can affect the contract are (1) Covid-19's Movement Control Order, (2) availability of skilled manpower and materials, and (3) change in pricing, weather conditions and/or political, economic and regulatory conditions.

Earnings estimates. The contract is expected to contribute positively to the earnings and net assets of the KKB in FY20. However, we make no changes to our earnings estimates as the value of the new job secured is within our contract replenishment assumptions.

Upgrade to BUY from NEUTRAL with unchanged target price at RM1.90. We pegged our valuation to 17x, or +1SD of 1-year historical PER of FY20 EPS, to reflect the group’s growth prospect in the Engineering segment thus a TP of RM1.90. We upgrade our recommendation from NEUTRAL to BUY due to recent price weakness.

Source: MIDF Research - 21 Apr 2020