This article first appeared in The Edge Malaysia Weekly on February 6, 2023 - February 12, 2023

AS investors increasingly pile into renewable energy (RE) stocks amid a global push for companies to be more environmentally responsible and address climate change impacts, this bodes well for Kejuruteraan Asastera Bhd (KAB), which has diversified into providing sustainable energy solutions (SES).

The mechanical and electrical (M&E) engineering service provider has seen its market valuation rise well above that of other solar power or RE-related firms in the country, with the counter currently trading at a historical price-earnings ratio (PER) of 195 times.

While it is not an apple-to-apple comparison, a check by The Edge shows that companies such as Mega First Corp Bhd, Jaks Resources Bhd, Cypark Resources Bhd, Samaiden Group Bhd and Solarvest Holdings Bhd are trading at much lower valuations, with their PERs ranging from seven to 48 times.

KAB founder and managing director Datuk Lai Keng Onn acknowledges that the company’s shares are currently trading at relatively high valuations, but he plans to increase its profitability to return value to shareholders.

“I think everybody is aware that KAB’s PER is high, so our immediate job is to increase our profitability. We realise that shareholders have high expectations, so we are working very hard [to justify the valuation],” he tells The Edge in an interview.

Lai believes that the only way for KAB to normalise its market valuation is to generate higher profits by securing more projects. He remains confident that the group’s SES projects will help improve its bottom line.

“At this stage, we hope to bring down our PER to below 100 times. Quite frankly, I never expected our PER to shoot up so high. But I guess when some investors want to come in and buy our stock, we can’t stop them. Still, if you look at the company’s fundamentals, we are on the right track,” he says.

Lai, 55, is KAB’s single-largest shareholder with a direct stake of 23.92% and an indirect stake of 10.31%. His wife Datin Alicia Chan Pey Kheng also sits on the board as executive director. The company’s second-largest shareholder is Kington Tong Kum Loong, who has 16.61% equity interest.

KAB’s 2021 annual report shows that its top 30 shareholders as at April 5, 2022, included Press Metal Aluminium Holdings Bhd executive director Koon Poh Kong (2%) and Chin Hin Group Bhd founder Datuk Seri Chiau Beng Teik (0.92%).

KAB’s share price had fallen sharply from an all-time high of RM1.16 on April 2, 2021, to 37 sen last Friday, translating into a market capitalisation of RM669 million.

KAB was listed on the ACE Market of Bursa Malaysia in 2017 before being transferred to the Main Market in 2020. For the nine months ended Sept 30, 2022 (9MFY2022), the group saw its net profit decline 27% year on year to RM2.28 million.

KAB made its foray into the SES segment in 2017 before going full steam in its diversification in 2019.

“Our group had focused on the M&E business for years. Most of our customers, including some property developers, had asked us to provide them with some energy-saving solutions. That was how we came up with the idea of venturing into the [SES] business,” says Lai.

Initially, KAB, via its energy-efficient solutions (EES) sub-division, started providing building management systems and chiller optimisation solutions for its clients. Subsequently, the group expanded into two other subdivisions — clean energy generation (CEG) and renewable energy generation (REG).

“Today, KAB is no longer at the starting line of energy ventures, and we are not in the process of transforming. In fact, we have successfully diversified into SES and these new businesses are already making decent financial contributions to our group. In total, we have 31 SES projects, 29 of which are generating concession revenue,” says Lai.

Under its CEG subdivision, KAB owns and operates a 2.2mw waste-to-heat recovery (WHR) plant at Sendayan in Seremban, Negeri Sembilan. The group also operates a 1.5mw cogeneration plant at Senawang in Seremban, making it one of the few owners of such power plants in Malaysia.

Notably, in early January, KAB secured a letter of award (LoA) from Petronas Gas Bhd (PetGas) unit Regas Terminal (Lahad Datu) Sdn Bhd for the engineering, procurement, construction and commissioning (EPCC) of a 52mw clean power plant and its associated facilities in Sabah for RM230 million.

“Obviously, PetGas is a very important client of ours. I told my team members that we really need to commit and perform. Our long-term goal is to be able to work together with PetGas — and for that matter, other major organisations — for more projects in the future. Definitely, KAB intends to speed up the growth of its SES segment and become a leading regional player,” Lai remarks.

Meanwhile, under its REG sub-division, KAB is undertaking some solar projects in Thailand and Malaysia. The group is also in the process of acquiring a 2.4mw biogas power plant in Kedah for RM15 million from a unit of Fitters Diversified Bhd.

In July last year, KAB acquired its first mini hydropower plant, dubbed Kombih III, in North Sumatera, Indonesia. The 11mw hydroelectric plant, which was acquired from Sarawak Cable Bhd, will continue to generate concession revenue for the company over the next 19 years.

Today, KAB’s SES segment has an order book of RM700 million, and its next target is to achieve RM1 billion.

“We believe this is a realistic target. SES gives us good quality recurring income and its profit margins of 15% to 25% are significantly higher than that of our M&E segment,” Lai explains.

KAB expects the SES segment to contribute 50% to its bottom line by as early as FY2023, from about 25% in FY2022. As a group, it hopes to achieve a revenue growth of 30% to 50% in the next three years.

“We didn’t venture into SES for no reason. Our SES business activities are supported by our M&E team and there are synergies to be derived from these two core businesses. We study and understand what our clients really need,” he says.

Unlike some RE players, which only focus on solar or hydro, KAB is capable of providing multiple energy solutions for its clients, Lai points out.

“That’s what distinguishes us from our competitors. In the next four years, we will be eyeing more assets in Malaysia, Thailand, Hong Kong, Vietnam and Indonesia,” he says.

It is worth noting that KAB is in the process of undertaking a private placement exercise involving 20% shareholding to raise about RM134 million, of which RM66.2 million will be allocated to the funding of existing and future SES projects.

Lai says KAB will be selective in terms of the candidates for the private placement as the group aims to rope in some long-term investors, including the institutional funds. “We are in the SES business. We have some strong business partners and we are securing some good projects. I believe all these will benefit our shareholders.”

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