• Maintain BUY and MYR1.90 TP, 34% upside and c.4% FY24F yield. KKBEngineering’s 9M23 core profit of MYR22.3m (9M22: MYR4.8m) met our(79%) full-year projections, but exceeded Street’s (83%). We estimate a 3-year earnings CAGR of 42% backed by better job prospects (particularlysteel fabrication works) from higher Petronas spending and Sarawak’sinfrastructure and green energy plans.

• Results review. KKB recorded >100% YoY earnings growth in 3Q23 toreach MYR9.6m (3Q22: MYR1m). The strong quarterly performance wasmainly underpinned by KKB’s steel fabrication division which recordedturnover growth of 208% YoY in 3Q23 from ongoing projects – threestandard wellhead platforms for Sarawak Shell, and the Rosmari &Marjoram onshore gas plant in Bintulu, among others. All in, PAT marginfor the engineering division as a whole in 3Q23 was higher at 7.8% vs 4%in 3Q22 which we believe was achievable via prudent cost measures arisingfrom efficient procurement strategies.

• As at end-September, KKB’s outstanding orderbook stood atc.MYR567m (1.7x cover ratio) with MYR510m worth of new jobs clinchedYTD in FY23 (vs our FY23 job replenishment target of MYR600m). Wegather that KKB’s tenderbook stands at c.MYR266m – of which we estimate>50% is for oil & gas (O&G) related jobs while the remainder is forengineering, construction, and manufacturing contracts. KKB plans toparticipate in more bids (particularly O&G) from FY24 onwards with anestimated amount which could exceed MYR1.5bn.

• Chances of winning more O&G-related jobs are backed by KKB’s roleas the primary contractor for price agreement for the EPC of standardwellhead platforms for Sarawak Shell and Sabah Shell Petroleum (effectivefor five years). Moreover, the recently secured job from Malaysia Marineand Heavy Engineering (MMHE MK, BUY, TP: MYR0.60) for the KasawariCarbon Capture & Storage (CCS) should enable KKB to build its presencein the CCS space, which is a focus under the National Energy TransitionRoadmap. A medium-term catalyst would be the rollout of the second phaseof the Sarawak Water Supply Grid Programme (SWP) in 1H24. KKB hadsecured c.MYR200m worth of jobs under the first phase of SWP.

• No changes to our earnings estimates as results met expectations. Assuch, our MYR1.90 TP is unchanged, pegged to an unchanged targetFY24F P/E of 17x after ascribing a 0% ESG premium/discount. The targetP/E is near the KL Energy Index’s 5-year mean, to reflect robust O&Gdomestic spending by Petronas (c.MYR113bn over CY23-27) that maybenefit fabricators such as KKB. We believe KKB deserves a BUY call aswe view it as a strategic Borneo play with 10.7% of the group owned by theSarawak Economic Development Corp – putting it at the forefront ofSarawak’s infrastructure wave.

• Key risks: Failure to secure new contracts and higher-than-estimated costof raw materials.

Source: RHB Securities Research - 22 Nov 2023