• MYR0.51 FV based on 15x FY25F (Oct) P/E. Kawan Renergy (KENERGY) intends to raise MYR33m from its IPO to fund working capital and amplify its recurring income as an independent power producer (IPP) in Malaysia. Positioned advantageously amid the escalating demand for power supply and national energy transition initiatives, it anticipates renewable energy (RE) and co-generation projects to be the primary revenue driver within two years. With an expected higher contribution from RE, KENERGY presents an enticing investment opportunity, particularly given its FY25F ex-cash P/E of 3.8x.

• Industrial processes expert. KENERGY has a proven track record spanning 28 years, providing design, fabrication, installation, and commissioning solutions tailored to its customers' specifications and requirements. Its expertise lies in understanding customer industrial process requirements and proposing suitable process plants across various industries, including food processing, oleo chemical and chemical processing, oil & gas, waste recovery, power plants, and utilities. The quality of its products is well recognised, meeting ASME U, U2, H and S Stamp Certification Marks, R Symbol, NB Mark, as well as ISO 9001:2015, ISO 14001:2015, and ISO 45001:2018 standards.

• Dual advantage in energy transition and oil & gas. The group foresees an uptick in higher-margin projects, particularly in RE and co-generation plants, aligning closely with Malaysia's National Energy Transition Roadmap (NETR). This roadmap, with its ambitious targets to reshape the energy landscape, projects substantial investment by 2050 and a significant increase in RE share. These projections present KENERGY with promising growth opportunities. By staying responsive to industry demands and supporting national energy objectives, it is positioned to play a pivotal role in steering Malaysia towards a sustainable, low-carbon energy future. Additionally, management is witnessing a surge in inquiries from its oil & gas clients that are benefiting from the increased capital expenditure by Petronas.

• Robust orderbook and tenderbook. As of 31 Mar 2024, its total orderbook stood at MYR72.9m, with a cover ratio of 74%. Approximately MYR51.8m of this total is expected to be recognised in FY24. The group is currently engaged in early discussions for an industrial process equipment, co-generation power plant, and two process plant projects, collectively valued at an estimated MYR113m. Additionally, KENERGY has tendered for five process plant projects, with a cumulative estimated value of MYR81.6m. We anticipate an 80% success rate for the tenderbook and direct negotiation deals.

• Earnings forecasts and valuation. We project a FY23-26F earnings CAGR of 17%, and ascribe a P/E of 15x to its FY25F earnings to derive our FV of MYR0.51. The valuation is in line with the 15x FY25F P/E of the Bursa Industrial Production Index (KLPROD). Key risks: Inability to renew licenses, absence of long term contracts, operational risks, warranty claims by customers and changes in market trend.

Source: RHB Securities Research - 14 May 2024