• BUY, new MYR1.72 TP from MYR1.60, 20% upside, c.4% FY23F yield. We expect KKB Engineering’s 4Q22 core profit to decline by >25% YoY, but expand >50% QoQ to MYR3-4.5m, partly due to the absence of contracts to supply mild steel pipes in Sarawak. Nevertheless, FY23F is expected to be a stronger year, backed by better job prospects from the possible rollout of the Sarawak Water Supply Grid Programme’s second phase this year, and more oil and gas (O&G) fixed structure fabrications in CY23 as per Petronas’ Activity Outlook 2023-2025.

• A preferred contractor by oil majors. In Nov 2022, KKB was appointed as the primary contractor for price agreement for the EPC of standard wellhead platforms (SWPs) for Sarawak Shell (SS) and Sabah Shell Petroleum, effective for five years. Pursuant to this, KKB received an award from SS in January for the provision of EPC of three SWPs for the MLNG FaS (F27, F22 and Selasih) Gas Field Development (estimated timeline: 15 months). The total contract value for the project, including a purchase order from Seri Ghanimi Contractor to supply steel pipes, is c.MYR351.7m.

• Job prospects. In Jul 2022, SS awarded a USD680m job to Samsung Engineering (SE) to construct an onshore gas plant for the Rosmari Marjoram project in Bintulu. On top of being a primary contractor to build SWPs for SS, KKB inked an MoU with SE in Oct 2021 to collaborate on project tenders – this may put KKB at the forefront to bid for fabrication jobs under the Rosmari Marjoram project. Other opportunities include fabrication jobs for the Kasawari Carbon Capture & Storage Project, whereby Malaysia Marine and Heavy Engineering (MMHE MK, BUY, TP: MYR0.59) is the EPCIC contractor. KKB was previously involved in two MMHE-related projects – Jerun and Kasawari.

• Orderbook. As at end Sep 2022, KKB’s orderbook was at MYR390m with a MYR898m tenderbook. Taking into account the latest contract from SS, we estimate KKB’s orderbook is at MYR500-600m. Given the latest developments, KKB should continue to bid for more jobs this year with a win rate of 30-40%. Therefore, we revised our FY23F job replenishment assumption to MYR600m from MYR400m following the SS contract win.

• We revise FY22-24F earnings up by 9%, 7% and 11% after pencilling in: i) Claims received under the variation of price (VOP) clause for some projects and ii) higher job replenishment assumptions. As such, we arrive at our new MYR1.72 TP pegged to an unchanged 17x FY23F target P/E, with a 0% ESG premium/discount. The target P/E is near the KL Energy Index’s 3-year mean, to reflect robust O&G spending by Petronas that may bode well for fabricators. We believe the target P/E is also justified by Sarawak's estimated MYR100bn injection into its economy by 2030, which should support the pipeline of future projects – mainly methanol and hydrogen related. KKB could be a major Borneo play. Key risks: Failure to secure new contracts and higher-than-estimated cost of raw materials.

Source: RHB Research - 18 Jan 2023