• Maintain BUY and MYR1.72 TP, 19% upside and c.4% yield. We reiterate our optimism in KKB Engineering’s earnings growth in FY23F as the group remains to be in a sweet spot to leverage on Sarawak’s infrastructure wave related to water, industrials (oil and gas, hydrogen), and possibly, renewable energy. Such prospects are backed by Sarawak’s attractiveness to investors with the state recording the third largest significant investment value of MYR28bn in CY22.

• Riding on Sarawak’s water infrastructure. Sarawak’s water supply coverage stood at 99% in urban areas and 67.2% in rural areas as at 2Q22. In light of this, Sarawak’s Budget 2023 earmarked an allocation worth MYR125m to implement water supply projects and another MYR900m for projects under the Sarawak Water Supply Grid Programme (SWP) for stressed areas. With the possible rollout of SWP Phase 2 this year, KKB is set to leverage on its track record as it secured eight contracts worth c.MYR250m in relation to the construction and commission of water supply under SWP Phase 1 which benefitted its civil construction sub-segment.

• Getting mightier with steel fabrication projects. KKB’s appointment as the primary contractor for the price agreement for the EPC of standard wellhead platforms for Sarawak Shell (SS) and Sabah Shell Petroleum (effective for five years) may put the group at the forefront when bidding for steel fabrication jobs from them. Moreover, SS awarded a USD680m job to Samsung Engineering (SE) in Jul 2022 to construct an onshore gas plant for the Rosmari Marjoram project in Bintulu. Chances for KKB to secure steel fabrication jobs under the Rosmari Marjoram project are high, premised on its MoU with SE inked in Oct 2021. In fact, SE has awarded a job to KKB under the Malaysia Sarawak Methanol Project for the supply of pre-engineering building steel structures in FY22. The steel fabrication segment contributed c.33% of its engineering segment revenue in FY22.

• No changes to our earnings forecasts. As such, our TP stays at MYR1.72 pegged to an unchanged target FY23F P/E of 17x after ascribing a 0% ESG premium/discount based on our in-house methodology. The target P/E is in line with the KL Energy Index’s 3-year mean – to reflect robust spending by Petronas (estimated at MYR60bn pa from CY23-27) that may bode well for fabricators like KKB. We believe this target P/E is also justified by Sarawak's estimated MYR100bn injection into its economy by 2030 to expand its infrastructure. With that, the group could be a strategic Borneo play through the 10.7% shareholding by Sarawak Economic Development Corporation – putting it at the forefront to be involved in state-related initiatives.

• An upcoming catalyst includes KKB’s potential involvement in the USD2.6bn Mentarang Induk Hydroelectric Project in North Kalimantan – Sarawak Energy has a 25% stake in the project’s holding company. Back in 2008, KKB was involved in the Bakun hydroelectric dam project.

• Key risks: Failure to secure new contracts and slowdown in project rollouts.

Source: RHB Research - 22 Mar 2023