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This article first appeared in The Edge Malaysia Weekly on January 13, 2020 - January 19, 2020

INVESTORS who acquired shares of Kejuruteraan Asastera Bhd (KAB) five months ago are now laughing all the way to the bank. Since July 31 last year, the share price of the mechanical and engineering (M&E) company has rocketed by more than 600%.

Slightly over two years since its debut on Bursa Malaysia on Nov 17, 2017, at an issue price of 25 sen per share, KAB’s share price had soared to RM1.48 as at last Thursday’s close, which translates into a trailing 12-month price-earnings ratio of 64.5 times.

Is the valuation justified, the green technology and energy efficiency aspirations of the company notwithstanding?

KAB founder and managing director Datuk Lai Keng Onn and his business partner Faith Chow Poh Ten own 55% of the company, and the former is now focusing on making green technology and energy efficiency the company’s new core business.

“We want to be a one-stop energy efficiency solution provider. If you look back to when we were listed, we were talking about M&E and refurbishment businesses. Then, we found energy efficiency to be a more practical business,” says Lai.

While green technology and energy efficiency appear to be more exciting, KAB’s bread-and-butter M&E segment continues to be the core driver of its top and bottom line, and the RM360 million in M&E orders are set to keep the group busy for the next three years.

But over the last year or so, Lai has been lining up new opportunities for KAB as his target for the new business is to contribute up to 10% to the group’s profit in FY2020.

Lai says prospective clients are more comfortable engaging KAB as they can opt not to incur any upfront cost because the group installs the equipment at the clients’ buildings at no cost — it even finances the projects at times — but takes a percentage of the savings.

“The reason we want to get into this is when you talk about refurbishment ... you are talking about energy savings, as electricity tariffs will rise as the government reduces its subsidy,” says Lai, who founded the group with his wife in 1997.

The first step to realising KAB’s aspirations was setting up KAB Technologies Sdn Bhd (KABT) in early 2018.

KABT provides project management and consultancy for the upgrading of M&E systems of buildings — particularly residential and commercial — to one that saves on energy cost.

In doing so, KABT uses data collection devices and the Internet of things such as sensor networks and communication modules that gather building usage data. The data allows KABT to build an accurate model of its clients’ usage patterns.

Last September, KABT entered into a 80:20 joint venture with Resource Data Management Asia Sdn Bhd to develop new technology solutions as well as identify strategic business developments and revenue generation.

A month later, KABT acquired an 80% stake in Energy Optimization (Thailand) Co Ltd (EOT) for THB4.64 million (RM642,200) cash, a purchase that allowed the former to be involved in nine energy performance contracts (EPCs) with Robinson PCL.

EOT had nine EPCs with the shopping mall operator in Thailand, but following the acquisition by KABT, Robinson added two EPCs to provide chiller optimisation for its Robinson Lifestyle Center Prachinburi and Robinson Department Store Rama9.

KABT has also secured an EPC with the owner of the Bandar Mahkota Cheras Mall, Foremost Wealth Management Sdn Bhd (FWM). This contract is special in the sense that FWM does not have to fork out  money for the installation of equipment.

KABT will install the equipment at the mall, carry out testing and commissioning of the equipment, prepare and deliver a benchmarking report according to energy savings and consumption, and operate and maintain the equipment at its own cost for six years. In return, KABT will be entitled to 70% of the cost savings.

Lai says the model allows clients to feel more comfortable engaging KABT. “So, we come in and finance the whole project and share the savings with the client. As a listed company, we have a good platform — and if necessary — to raise funds via the capital market or through financial institutions.

“Since we have this business model, we have received a lot of enquiries because clients are more comfortable sharing the savings rather than paying us to install the energy efficiency solutions.”

KABT is expected to be a source of recurring income for the group as the contracts are usually over the medium to long term. “I have always dreamt of owning a highway, but I can’t afford one,” Lai jokes about the recurring income nature of the business.

KAB is also venturing into solar energy generation via the acquisition of a 30% stake in LeveragEdge Sdn Bhd (LSB), whose partnership it believes will boost its chances next year in the Large Scale Solar 4 (LSS4) tender.

“We will build up the business first this year with small-scale solar projects, such as commercial and industrial rooftop solar panel installations and management, in preparation for the LSS4,” says Lai.

Putrajaya is keen to increase the share of energy mix from renewable sources to 20% by 2025, from the current 2%, which will require investments to the tune of RM33 billion.

Apart from the energy efficiency solution and solar energy generation businesses, KAB also provides combined heat and power co-generation and waste heat recovery solutions, and is currently participating in some tenders.

Still, M&E remains the core business for now. Among KAB’s major clients are established developers such as Kerjaya Prospek Holdings Bhd, Mah Sing Group Bhd and Pavilion Group. KAB is a nominated subcontractor for the Pavilion Damansara Heights and Bukit Jalil projects.

Lai says some of the major contracts KAB secured will start contributing to the bulk of group income beginning this year. The nature of the construction business is such that some 60% of the income is only paid in the middle of the construction term, before tapering off.

In the nine-month period ended Sept 30, 2019, KAB recorded a net profit of RM7 million, slightly lower than the previous corresponding period, due to a 25% hike in administrative expenses as the company was starting a number of major jobs secured last year. With the bulk of income coming in this year, Lai says KAB is confident its bottom line will expand about 10% in FY2020.

Given the surge in its share price, KAB’s bottom line will need a hefty boost to justify its lofty valuation.

 

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