• Maintain BUY, new TP of MYR1.80 from MYR1.72, 25% upside with c.4% FY24F yield. KKB Engineering’s 1Q23 core profit of MYR3.4m (+53% YoY) is below estimates, at only 12% of our and Street full-year projections. The negative deviation was due to some steel fabrication and civil construction jobs that have yet to pick up pace. We estimate a 3-year earnings CAGR of 40%, backed by better job prospects from an increase in Petronas’ expenditure budget, and upcoming Borneo-based projects such as the Trans-Borneo Highway.

• Results review. Despite recording revenue of MYR60.5m (-35% YoY) in 1Q23 (1Q22: MYR93.4m) KKB’s PBT for the same quarter was >50% YoY higher. In fact, its 1Q23 PBT margin spiked up to 9.2% (1Q22: 3.4%), due to improved GPMs from the steel fabrication and civil construction divisions (due to variation orders), and supported by a better performance from its associate Edisi Optima, which is involved in the requalification and repair of LPG cylinders.

• Orderbook. We estimate KKB’s outstanding orderbook (as at end-April) at c.MYR700m (1.7x cover ratio). We gathered that its submitted bids for c.MYR1bn worth of projects – of which 80% are for oil & gas related jobs while the remainder is for engineering, construction and manufacturing contracts (outcome to be known in 2H23). KKB’s appointment as the primary contractor for the price agreement for the EPC of standard wellhead platforms for Sarawak Shell and Sabah Shell Petroleum (effective for five years) may put the group at the forefront when bidding for steel fabrication jobs from such oil majors. Looking ahead, the recently secured oil & gas jobs from Sarawak Shell and Samsung Engineering should contribute positively in the coming quarters as they move along the S-curve.

• We cut FY23-25F earnings by 12-14% as we have now factored in a more conservative timeline for its engineering projects. Post forecast adjustments and the rollover of our valuation base year to FY24 from FY23, we arrive at a new TP of MYR1.80, 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 KL Energy Index’s 3-year mean – to reflect robust oil & gas spending by Petronas (c.MYR60bn pa over 2023-2027) that may benefit fabricators. This target P/E is also justified by the Sarawak State Government’s estimated MYR100bn injection into its economy by 2030, which may support infrastructure expansion. With that, KKB could be a strategic Borneo play, backed by its lean balance sheet (net cash position of >MYR200m) – enabling it to easily gear up for future projects. Key downside risks include a failure to secure new contracts, higher-than- estimated cost of raw materials, and a slowdown in construction activities.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for more details.

Source: RHB Research - 25 May 2023