KEY INVESTMENT HIGHLIGHTS

• Earnings higher by 113.1%yoy to RM6.8m in 1QFY20

• Lower topline due to lower progress claims

• Manufacturing sector outperformed

• No changes to our earnings estimates

• Maintain BUY with adjusted target price at RM2.10 (from RM1.90) as we rollover valuation base year to FY21

Earnings higher by 113.1%yoy to RM6.8m in 1QFY20. The group registered earnings of RM6.8m in 1QFY20, higher by +113.1%yoy compared to RM3.2m achieved in the same period last year. The growth in earnings was largely due to improved margin from the Engineering sector, in particular the Group’s Civil Construction division. The 1QFY20 earnings were within ours and consensus’ expectations at 23.5% of respective annual estimates.

Lower topline due to lower progress claims. Total revenue dipped by -8.2%yoy to RM108.2m in 1QFY20. The lower revenue in the current quarter was mainly due to lower progress claims from the Pan Borneo Highway project in the State of Sarawak (Phase 1 Works Package Contract –WPC-09) undertaken by its JV Company, i.e. KKBWCT Joint Venture Sdn Bhd. Nonetheless we still anticipate better topline contribution in the coming quarters on the back of an improvement in the amount of YTD job replenishment in FY20 which amounted to RM338m. Currently, KKB’s outstanding order book stands at approximately RM888m.

Manufacturing sector outperformed. The Group’s topline for the manufacturing sector improved by +165.5%yoy to RM23.1m, compared to RM8.7m registered in the same quarter last year. This improvement was driven by strong performance of the Steel Pipes manufacturing division. KKB’s Steel Pipes manufacturing business - under the two subsidiary companies operated in Sarawak and Sabah, posted higher revenue of RM21.6m in 1QFY19 as compared to RM4.9m registered in 1QFY19. Its topline was boosted by the increase in off takes of Steel Pipes required under the Sarawak Water Supply Grid Programme before the MCO imposition in March 2020.

Maintain forecasts. We make no changes to our estimates as the quarterly earnings met our expectation.

Maintain BUY with adjusted target price at RM2.10 (from RM1.90). We adjusted our TP to RM2.10 as we roll forward our valuation base year to FY21. The new target price was arrived after pegging a PE multiple of 15x to KKB’s FY21EPS of 14.0sen. Moving forward, we consider the prospect of KKB as exciting to be fuelled by the potential rollout of Sarawak infrastructure packages. Having said that, we understand that the COVID-19 pandemic may cause disruptions to the global supply chain and logistics which may impact the supply of materials, equipment as well as resources of KKB’s on-going projects. Maintain BUY.

Source: MIDF Research - 22 May 2020