• Initiating coverage with a BUY, with MYR1.85 TP based on 17x FY23F P/E, 29% upside and c.4% FY23F yield. The multiple is +0.5SD from KKB Engineering’s 3-year mean. We believe this is justified due to the multiple catalysts on the horizon, backed by Sarawak's estimated MYR100bn injection into its economy by 2030, which may support the pipeline for future projects. Valuation is also rather undemanding, trading at 13.1x FY23F P/E, or -1SD from its 5-year mean.

• Commendable civil construction job prospects. KKB via its subsidiary, KKB-WCT JV has been shortlisted to bid for the Second Trunk Road (STR) and Sarawak Coastal Highway (SCH) projects in Sarawak – total estimated cost of MYR11bn (expected award: early 2023). Other opportunities may come from the higher allocation of MYR4bn (from MYR2.8bn) for the Sarawak Water Supply Grid Programme (SWGP). The group is no stranger to the programme, having clinched c.MYR250m worth of projects under its first phase. Therefore, it stands a high chance of being involved in the second phase of SWGP (possibly later this year or the next).

• Beneficiary of expected stronger oil and gas activity. Higher Petronas capex should boost KKB's steel fabrication business for oil & gas platforms via its subsidiary, OceanMight, with it being the only other Petronas- licensed fabricator in Sarawak besides Brooke Dockyard and Engineering Works Corp. Moreover, OceanMight's tie-up with Samsung Engineering could pave the way for overseas job opportunities. To date, OceanMight has been awarded 14 contracts worth c.MYR1bn in total.

• Strategic alliances to open doors for new opportunities. Sarawak Economic Development Corporation’s (SEDC) strategic investment (10.7% ownership) in KKB may see it potentially roped in for upcoming state projects aligned with Sarawak’s Post COVID-19 Development Strategy 2030 (PCDS 2030). For instance, Sarawak's aim to expand its hydrogen value chain could benefit KKB given its forte in steel fabrication, which may be required in setting up hydrogen plants.

• Earnings estimates. We advise investors to look past the slowdown of YTD FY22 job wins as we see KKB being in a sweet spot to gain from the upcoming projects in Sarawak from FY23F, backed by its net cash position. As such, FY22F earnings should fall 18% YoY before a >50% YoY growth in FY23F.

• ESG efforts. KKB uses a decanter, which reduces bitumen run-off by at least 20%. Its Cement Waste Water System (CWWS) collects all the cement water and accumulates it at designated locations to be dried and disposed as dry soil. Prioritisation in work safety is also reflected in its record safe-working man hours in FY21. Our MYR1.85 TP incorporates a 0% ESG premium on its intrinsic value based on its ESG score of 3.0.

• Downside risks: Failure to secure new contracts, higher-than-estimated cost of raw materials, and a slowdown in construction activities.

Source: RHB Research - 21 Sep 2022