• Maintain BUY and MYR1.85 TP, 28% upside with c.2% FY22F yield. Petronas has confirmed the discovery of a good-quality gas reservoir via the Cengkih-1 exploration well in Block SK320, in the Central Luconia Province, about 220km off the coast of Bintulu in Sarawak. This should present opportunities for KKB Engineering’s steel fabrication unit (47.1% of FY21 revenue) which covers O&G facilities, as there could be a need for wellhead platforms for drilling activities in this area. The stock is trading at an undemanding 13.2x FY23F P/E, at 1SD below the 5-year mean.

• Background of Block SK320. The block is operated by Mubadala Petroleum, which has a 55% participating interest in the production-sharing contract. The remaining 45% is held by Petronas Carigali and Sarawak Shell. The block itself has commenced its first gas production via the Pegaga gas field earlier in March. The Pegaga field recorded the discovery of 1trn cubic feet of additional gas in place, following the post-drill results which confirmed a larger and better-quality reservoir. Meanwhile, the Cengkih-1 exploration well is located nearby the Pegaga field.

• What may be in store. We think that KKB, via its subsidiary OceanMight, will be a potential beneficiary of this latest oil discovery. This is because OceanMight was awarded a job by Sapura Fabrication in May 2018 for the provision of the procurement and construction of wellhead deck, piles and conductors for the Pegaga Development Project under Mubadala Petroleum (this project has been completed). Hence, OceanMight is no stranger to Block SK320 and also Mubadala Petroleum. Even if de- commissioned wellhead platforms are to be deployed, OceanMight could still benefit – albeit with a lower contract value – via requalification works. All in, we reiterate that higher capex by Petronas may boost OceanMight’s steel fabrication business for O&G platforms, with it being the only other Petronas-licensed fabricator in Sarawak besides Brooke Dockyard and Engineering Works Corp.

• Earnings and valuation. We make no changes to our earnings estimates. We maintain our TP of MYR1.85 pegged to a target FY23F P/E of 17x after ascribing a 0% ESG premium based on our in-house methodology. Although this target P/E is +1SD from >+2SD from the 3-year historical mean of its own P/E and the KL Construction Index’s, 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. Moreover, the valuation target is in line with the KL Energy Index’s 3-year mean P/E of 17x, which reflects O&G activity – leading to possibly better prospects for fabrication services for O&G platforms, underpinned by a higher guided Petronas capex.

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

Source: RHB Research - 4 Oct 2022