• Keep BUY with new MYR1.95 TP from MYR2.11, 19% upside and c.3% yield. KKB Engineering’s 1H24 core profit of MYR7m (-45% YoY) missed our and Street’s estimates – making up 24% and 22% of full-year projections partly due to higher-than-expected portion of non-controlling interests (NCI). Nevertheless, we expect better contributions in 2H24 from projects such as the Rosmari & Marjoram (R&M) onshore gas plant in Bintulu project moving higher along the S-curve. We continue favouring KKB for its prowess in Sarawak-centric infrastructure and oil and gas (O&G) jobs.

• Results review. KKB’s engineering division saw a 12% YoY profit after tax (PAT) growth in 2Q24 due to steel fabrication works for Sarawak Shell (c.MYR300m) and the R&M onshore gas plant in Bintulu (MYR112.6m) amongst others. Meanwhile, the manufacturing arm recorded a loss-after- tax of MYR1.4m in 2Q24 (2Q23 loss-after-tax: MYR0.4m) amidst the completion of mild steel pipes supply to Brunei combined with a recent purchase order for a water treatment plant in Sibu, which is still in early stage.

• Orderbook. As at end-2Q24, KKB’s outstanding orderbook stood at c.MYR300m (vs end-1Q24 of c.MYR400m), with c.MYR38m jobs clinched in 1H24 vs our initial FY24F job replenishment assumption of MYR500m. KKB’s tenderbook stands at c.MYR154m (as of end-1H24), which relates to the engineering and manufacturing arms. Notwithstanding this, KKB is in the midst of participating in bids (particularly O&G), with an estimated amount which could exceed MYR1.8bn (estimated 30-40% success rate based on our assumption). Bid outcomes may be known in the next nine months.

• We reduce FY24-FY26F earnings by 14%, 7%, and 3% as we adjust our NCI estimates and lower our FY24F job win replenishment target to MYR300m (from MYR500m.) As such, we arrive at a new TP of MYR1.95 (from MYR2.11) by pegging our FY25F EPS to an unchanged target P/E of 17x, which bakes in a 2% ESG premium. The target P/E is near the Bursa Malaysia Energy Index’s 5-year mean and is justified by Sarawak’s O&G sector that is projected to surpass MYR60bn in GDP by 2030. We also continue to highlight KKB’s emphasis on the social aspect of operations reflected through the 9.7m of man hours with zero loss time injury across 17 oil and gas projects as of end-July.

• Catalysts. We do not discount KKB’s potential to clinch engineering, procurement and construction (EPC) jobs from upcoming hydrogen projects in Sarawak ie H2biscus, which targets to begin EPC works by end FY24. Other opportunities may arise from jobs related to carbon capture, utility and storage (CCUS) as Petroleum Sarawak (PETROS) launched the Sarawak Bid Round 2024 for the development of CCUS infrastructure in the state. KKB previously received a service order related to Petronas’ Kasawari carbon capture storage project in Nov 2023.

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

Source: RHB Research - 23 Aug 2024