KUALA LUMPUR (June 23): RHB Investment Bank Bhd has initiated coverage on Kumpulan Powernet Bhd (KPower) at RM2.40, with a "buy" rating and a target price of RM3.46, pegged to 14 times price-earnings for the financial year ending June 30, 2021 (FY21), factoring in the recently proposed 35% share placement to employ a higher share base.

In a note today, the research house said KPower is "poised to transform into an energy and utility services player, following the entry of new shareholders and a management team since June 2019".

"We are upbeat about this stock as it offers an exponential earnings compound annual growth rate of 149%, a potential doubling of its order book by end-FY21, superior return on equity, and has an undemanding valuation of 9.7 times."

With the introduction of new board members and management team, KPower is repositioned to be an end-to-end provider of concession-based renewable energy infrastructure services, focusing on hydro, solar, waste-to-energy and biomass, it added.

RHB said KPower's order book value is targeted to hit RM2 billion by end-FY21, adding that KPower has demonstrated its ability to win big contracts by securing about RM1 billion in new jobs over the past year.

"Its current bid value stands at RM3 billion, of which 65% is from the energy segment, followed by the infrastructure and utility sectors at 34% and 1%."

"40% of the tenders were secured from the Middle East, while the remaining are from Malaysia (20%), Nepal (17%), Indonesia (16%) and Laos (7%). KPower has also received queries to undertake projects in the Philippines."

"We believe these job opportunities — especially the one situated in the Middle East — leverage on Datuk Karim's (KPower non-executive chairman) connections, as he has a strong presence in the region," the note said.

"The recently announced 35% private placement will allow KPower to execute projects secured, as well as strengthen its balance sheet for future growth. A dividend payout policy of at least 20% potentially translates into FY20-22 dividends per share of 1.8-6.9 sen, implying yields of 0.7-2.9%."

RHB highlighted that key risks include change in government policies towards renewable energy, competition risks, and weaker-than-expected margins.

For the cumulative first nine months of FY20 (9MFY20), KPower recorded net earnings of RM5.5 million compared with a loss of RM1.8 million for 9MFY19.

RHB expects KPower's earnings for the fourth quarter of FY20 to be stronger on a quarter-on-quarter basis, on the back of higher billings from the existing contracts in hand, despite experiencing some disruption in the property development projects due to the Movement Control Order.

At 11.56am, KPower shares shed one sen (0.42%) to RM2.39.