• Maintain BUY, with new MYR2.02 TP from MYR1.90, 17% upside and c.3% FY24F yield. We expect KKB Engineering’s 4Q23 core profit to be in the region of MYR7-8m, bringing its FY23F profit to MYR30m (FY22: MYR12m). Factors for such performance may come from higher progress billings of ongoing fabrication jobs – the three standard wellhead platforms for Sarawak Shell (c.MYR300m), and the Rosmari & Marjoram (R&M) onshore gas plant in Bintulu (MYR112.6m).

• Orderbook. As at end Sep 2023, KKB’s outstanding orderbook was close to MYR600m, with MYR510m jobs clinched in FY23 while the group’s tenderbook stood at c.MYR266m – of which we estimate 50-60% is for oil & gas-related jobs while the remainder is for engineering, construction, and manufacturing contracts. Nevertheless, the group is in the midst of participating in bids (particularly oil and gas) with an estimated amount which could exceed MYR1.5bn (25-35% success rate). The outcome of these bids may be known over the next 18 months, 2Q24 being the earliest.

• Aside from KKB’s role as the primary contractor for the price agreement for the EPC of standard wellhead platforms for Sarawak Shell and Sabah Shell Petroleum, prospects may also come from PTT Exploration and Production (PTTEP TB, NR). The Lang Lebah offshore field, under which PTTEP is the operator, has already entered the bidding stage for offshore EPC contracts. We do not discount KKB’s capability to participate in the Lang Lebah project as the group was involved in PTTEP’s Pemanis Satellite topside job in 2020.

• Hydrogen-related prospects. Sarawak Economic Development Corporation’s (SEDC) subsidiary is working with South Korean companies such as Samsung Engineering (SE) (028050 KS, NR), Korea National Oil Corp and Lotte Chemical Corp (011170 KS, NR) for a hydrogen project. We believe KKB’s job wins from SE, such as the R&M onshore gas plant and the Sarawak Methanol project may put the group at an advantageous position for the said hydrogen project (estimated rollout towards end-2H24).

• We increase our FY23F-25F earnings by 5%, 7%, and 2% as we expedite progress billings of its ongoing jobs and increase our FY24 job replenishment assumptions to MYR500m (from MYR400m). As such, we arrive at a new TP of MYR2.02 – pegged to an unchanged 17x FY24F P/E after ascribing a 0% ESG premium. The target P/E is above the KL Energy Index’s 5-year mean of 15x, to reflect robust oil & gas domestic spending by Petronas (c.MYR113bn over CY23-27) and KKB’s track record of securing MYR1.6bn worth of oil and gas fabrication related jobs since 2014 (Figure 1). Our forecasted three-year earnings CAGR of 43% for KKB is not just supported by the factors above but also prospects coming from the anticipated second phase of the Sarawak Water Supply Grid programme (c.MYR250m jobs secured under the first phase) – backed by Sarawak’s budgeted record development expenditure of MYR9bn for 2024.

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

Source: RHB Securities Research - 23 Jan 2024

Source: RHB Securities Research - 23 Jan 2024