• Maintain BUY and MYR2.02 TP, 15% upside with c.4% FY24F yield. According to the Sarawak Premier Tan Sri Datuk Patinggi Abang Haji Abdul Rahman Zohari Tun Openg, Sarawak requires an expenditure of MYR1.1bn to upgrade the state’s entire water pipeline system, which would span roughly 2,740km. We are upbeat on this development, as KKB Engineering had previously been involved in water supply-related projects in Sarawak.

• KKB was a clear beneficiary of water supply projects in Sarawak via the Sarawak Water Supply Grid Programme (SWGP) launched in 2018 – which entailed the need for laying and replacing pipelines. The group secured at least MYR200m worth of projects under SWGP between 2019 and 2020. Aside from the latter, KKB has also been involved in water supply-related works from other bodies such as LAKU Management (Jul 2021) and diversion works at Sungai Maong Paroh from Kuching Water Board (KWB) (Mar 2022).

• In terms of segmental contributions, water-related construction projects fall under KKB’s civil construction unit, which made up 43% (FY22: 64%) of the group’s engineering & construction division in FY23 (the remainder came from the steel fabrication and hot dip galvanising business). Trends-wise, revenue from civil construction was c.22% YoY lower in FY23. This was partly due to higher billings from the Pan Borneo Highway initiative, combined with a number of water-related projects for Sarawak Rural Water Supply Department or JBALB, LAKU Management, and KWB, which were already reaching their tail-ends in FY22.

• How can KKB benefit from the planned upgrade of water infrastructure? Out of the said MYR1.1bn budget, MYR247m will allocated to replace aging and damaged pipes around Kuching, Samarahan, and other parts of Sarawak (scheduled to start this year). Such developments are timely for KKB to potentially boost its civil construction arm, as the Pan Borneo Highway is slated for completion in April while the majority of its water-related projects have reached their tail-ends. Additionally, KKB’s steel pipe manufacturing arm (4% of FY23 group revenue) may benefit from this, as it previously received purchase orders from other SWGP contractors.

• No changes to our earnings estimates. Our TP stays at MYR2.02, pegged to an unchanged 17x target FY24F P/E after ascribing a 0% ESG premium/discount 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 KKB trades at -0.5SD below its 5-year mean P/E.

• A major catalyst includes earlier-than-expected involvement in hydrogen projects via its subsidiary KKB Energy, which plans to undertake projects related to renewable energy, eg assembly of hydrogen electrolysers.

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

Source: RHB Research - 9 Apr 2024