• Still BUY, new MYR2.11 TP from MYR2.02, 15% upside with c.3% yield. 1Q24 core profit of MYR3.5m (+14% YoY) missed our and Street’s estimates – making up 10% of both full-year projections – due to higher-than-expected portion of non-controlling interests (NCIs). Nevertheless, we expect better contributions in the coming quarters to bring overall FY24F earnings growth to 10%, as projects such as the Rosmari & Marjoram (R&M) onshore gas plant in Bintulu project move higher along the S-curve. We still see KKB Engineering as a jewel for its prowess in Sarawak-centric jobs.

• Results review. KKB’s engineering division saw a 74% YoY PAT growth in 1Q24 due to higher progress billings for civil construction jobs (eg Pan Borneo Highway) and steel fabrication works, eg Sarawak Shell (c.MYR300m) and the R&M onshore gas plant in Bintulu (MYR112.6m) amongst others. Meanwhile, the manufacturing arm recorded a PAT of MYR0.3m (1Q23: MYR0.8m loss-after-tax), mainly backed by the export of mild steel pipes to Brunei and other ad-hoc customers.

• Orderbook. As at end 1Q24, KKB’s outstanding orderbook stood at c.MYR400m (end 4Q23: MYR550m) with c.MYR38m jobs clinched in 1Q24 vs our FY24 job replenishment assumption of MYR500m. The group’s tenderbook stands at c.MYR168m (end 1Q24), of which we estimate 50-60% is for oil & gas-related jobs while the remainder is for engineering, construction, and manufacturing contracts. Nevertheless, KKB is in the midst of participating in bids (particularly oil and gas ones) with an estimated amount that could exceed MYR1.5bn (25-35% success rate). Bid outcomes may be known in the next 18 months, with 2Q24 being the earliest and end 2H25 the latest.

• We reduce FY24F-26F earnings by 14%, 4%, and 4% as we adjust our NCI estimates. We also roll forward our valuation base year to FY25F (from FY24F). As such, we arrive at a new TP of MYR2.11 by pegging our FY25F EPS to an unchanged target P/E of 17x after ascribing a 2% ESG premium based on a higher ESG score of 3.1 (previously 3.0). The revised ESG score follows the adjustment for the social component to reflect KKB’s OceanMight subsidiary, which achieved 1m safe exposure hours for the standard wellhead platform projects under the Sarawak Shell contract. The target P/E is near the Bursa Malaysia Energy Index’s 5-year mean – to reflect robust oil and gas spending by Petronas, which may bode well for fabricators.

• Catalysts include earlier-than-expected involvement in hydrogen projects via subsidiary KKB Energy, which plans to undertake projects related to renewable energy, eg assembly of hydrogen electrolysers. The latest plan by Sarawak to have 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. Key major key risks include slower-than-expected job replenishment trends.

Source: RHB Research - 21 May 2024