• Maintain BUY with MYR1.72 TP, 22% upside and c.4% FY23F yield. KKB Engineering’s FY22 core profit of MYR12.5m exceeded our estimates and met Street’s, making up 138% and 95% of full year projections. The positive deviation was mainly due to lower-than-expected finance costs. FY23F is expected to be a stronger year backed by better job prospects arising from the possible rollout of Sarawak Water Supply Grid Programme’s second phase this year and higher number of oil and gas fixed structure fabrications in 2023 as per Petronas’ Activity Outlook 2023-2025.

• Results review. KKB’s 4Q22 core earnings amount of MYR7.6m (-4% YoY) was the highest during 2022 partly due to the higher activity for the manufacturing of steel pipes and liquefied petroleum gas cylinders. The YoY weakness in 4Q22 came from KKB’s construction segment which saw a 34% YoY revenue drop in 4Q22 as most construction projects - namely the Pan Borneo Highway and water related construction projects - are nearing completion. Its steel fabrication division also put a lid on earnings – as revenue only came from on-going projects in hand. Nevertheless, the recently-secured job for the EPC three standard wellhead platforms awarded by Sarawak Shell (SS) in January should contribute positively in the coming quarters.

• Orderbook. As at end of January, KKB’s outstanding orderbook stood at MYR651.7m which translates into a 1.7x orderbook-to-revenue cover ratio. We gathered that KKB submitted bids for MYR849m worth of projects – of which MYR350m is for oil & gas platform fabrication jobs while the remainder is for engineering, construction, and manufacturing contracts. The outcomes for the tenders is expected to be known sometime in 3Q23. KKB’s appointment as the primary contractor for the price agreement for the EPC of standard wellhead platforms for SS and Sabah Shell Petroleum (effective for five years) may put the group at the forefront when bidding for steel fabrication jobs from such oil majors.

• We maintain our FY23-24F earnings as our forecasts have taken into account improved margins driven by the steel fabrication segment in light of better oil and gas activity. We also introduce FY25F earnings which entail a job replenishment of MYR500m, premised on Sarawak’s infrastructure wave. As such, our TP stays at MYR1.72 pegged to an unchanged target FY23F P/E of 17x after ascribing a 0% ESG premium based on our in-house methodology. The target P/E is near the KL Energy Index’s 3-year mean – to reflect robust oil and gas spending by Petronas that may bode well for fabricators. We believe this target P/E is also justified by Sarawak's estimated MYR100bn injection into its economy by 2030, which may support infrastructure expansion. With that, KKB could be a strategic Borneo play backed by its lean balance sheet (net cash position of >MYR200m)– enabling it to easily gear up for future projects.

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

Source: RHB Research - 24 Feb 2023