• Maintain BUY with MYR2.02 TP, 15% upside and c.4% FY24F yield. KKB Engineering’s FY23 core profit of MYR26.8m (+114% YoY) missed ours and Street’s estimates – making up 91% and 92% of full-year projections. The negative deviation was mainly due to higher-than-expected administrative costs. We expect FY24F to continue charting earnings growth of 28% YoY backed by the ramp-up of ongoing steel fabrication jobs in particular, combined with the group’s potential to leverage on the MYR9bn allocation by the Sarawak Government for development initiatives in 2024.

• Results review. KKB’s engineering division saw a 66% YoY PAT growth in FY23 due to higher progress billings of civil construction jobs (Pan Borneo Highway and Sarawak Flagpole) and steel fabrication works for Sarawak Shell (c.MYR300m) and the Rosmari & Marjoram (R&M) onshore gas plant in Bintulu (MYR112.6m). Hence, the engineering arm saw a higher PAT margin of 7.3% in FY23 (FY22: 5.2%). Meanwhile, the manufacturing arm recorded a PAT of MYR1.9m (FY22 loss after tax: MYR1.1m), mainly backed by export of mild steel pipes to Brunei and from other ad-hoc customers in Sabah.

• Orderbook. As at end 4Q23, KKB’s outstanding orderbook stood at c.MYR550m (with c.MYR510m jobs clinched in FY23), which translates into a 1.2x orderbook-to-revenue cover ratio. KKB’s tenderbook stood at c.MYR290m, of which we estimate 50-60% is for oil and gas related jobs while the remainder is for engineering, construction, and manufacturing contracts. Nevertheless, KKB is in the midst of participating in bids (particularly in oil and gas) with an estimated amount which could exceed MYR1.5bn (25-35% success rate). Outcomes of such bids may be known over the next 18 months, with 2Q24 being the earliest and end-2H25 the latest.

• We maintain our FY24-25F earnings as our forecast has taken into account improved margins driven by the steel fabrication segment in light of better oil and gas activity and infrastructure prospects. We also introduce FY26F earnings which entails a job replenishment of MYR600m – premised on Sarawak’s infrastructure wave. Hence, our TP stays at MYR2.02, pegged to an unchanged target FY24F P/E of 17x after ascribing a 0% ESG premium based on our in-house methodology. The target P/E is near the Bursa Malaysia Energy Index’s 5-year mean – to reflect robust oil and gas spending by Petronas that may bode well for fabricators. Valuations also appear undemanding as the stock is trading -0.5SD below its 5-year mean P/E.

• Catalysts include earlier-than-expected involvement in hydrogen projects via its subsidiary KKB Energy, which plans to undertake projects related to renewable energy, ie assembly of hydrogen electrolysers. The latest plan by Sarawak to be the first graphite manufacturing plant (USD1.5bn) in ASEAN may also spell additional opportunities for KKB given the group’s track record in steel fabrication works for industrial buildings in the state.

• A major key risk is slower-than-expected job replenishment trends.

Source: RHB Research - 23 Feb 2024