• Stay BUY, new MYR1.86 TP from MYR1.95, 17% upside with c.3% yield. 9M24 core earnings of MYR15.8m (-29% YoY) missed our estimates – at 63% of our full-year projections – partly on a higher-than-expected portion of non-controlling interests (NCIs). We do expect better contributions in 4Q24 from projects that move higher along the S-curve, eg the Rosmari & Marjoram (R&M) onshore gas plant in Bintulu.

• Results review. The engineering wing saw a 7% YoY PAT growth in 3Q24, with net margins remaining near 8% due to the progress of steel fabrication works for Sarawak Shell (c.MYR300m) and the R&M onshore gas plant in Bintulu (MYR112.6m) amongst others. The manufacturing arm recorded a loss-after-tax of MYR0.5m in 3Q24 (3Q23 PAT: MYR1.5m) amidst the completion of mild steel pipes supply to Brunei. An order secured in May for a water treatment plant in Sibu remains in the early stages.

• Orderbook. As at end 3Q24, KKB Engineering’s outstanding orderbook stood at c.MYR165m (end 2Q24: c.MYR300m) with c.MYR130m jobs clinched in 9M24 vs our earlier FY24F job replenishment of MYR300m. KKB’s tenderbook stands at c.MYR295m, with outcomes likely to be known between late 4Q24 and 1Q25. Notwithstanding this, the group is in the midst of participating in additional bids worth MYR350m by end 4Q24 in Sabah and Sarawak – potentially bringing the tenderbook to c.MYR645m (estimated 30-40% success rate based on our assumption) by end 2024. Outcomes for the additional bids may be known by end 1H25.

• We reduce FY24F-FY26F earnings by 13.5%, 5%, and 8% as we adjust our NCI estimates and lower our FY24 job wins replenishment target to MYR250m from MYR300m. As such, we arrive at a new TP of MYR1.86 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 oil and gas sector, which is projected to surpass MYR60bn in GDP by 2030. We also highlight KKB’s emphasis on the social aspect, reflected through the 10m of man hours with zero loss time injury across 17 projects (since 2014) as of end October.

• Prospects. KKB may strongly benefit from Sarawak’s own MYR10.8bn development expenditure for 2025 (2024: MYR9bn) in light of its track record in state-driven projects, namely the Bakun Dam, Miri Airport hangar, Kuching Airport redevelopment, Pan Borneo Highway, and Sarawak Water Supply Grid programme among others. We also do not discount KKB’s potential to clinch EPC jobs from upcoming hydrogen projects in Sarawak such as H2biscus, with EPC works to begin after the targeted final investment decision in 4Q24.

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

Source: RHB Research - 12 Nov 2024