Kawan Renergy bets on renewables

Lim: Given the current sentiment, we are not expecting development to grow by leaps and bounds, but we remain busy. — AZLINA ABDULLAH/The Star

DESPITE recently missing analysts’ earnings estimates due to cost overruns, Kawan Renergy Bhd says its outlook remains intact and expects the issue to be resolved within the next six months.

Managing director Lim Thou Lai says the engineering solutions provider, which specialises in the design, fabrication, installation and commissioning of industrial process equipment and plants, as well as renewable energy (RE) and co-generation facilities, has continued to bid for projects as the setback has not derailed its growth plans.

“We have not settled the claims with them yet but will likely do so within the next half year,” Lim tells StarBiz 7.

The issue arises from a project for one of Kawan Renergy’s clients based in Sabah, where the group was involved in a power plant development.

According to a note by Public Investment Bank (PublicInvest) Research, the cost overruns stemmed from additional scope of work beyond the initial agreement, coupled with higher manpower deployment to mitigate project delays.

This resulted in the group’s core earnings for the first half of financial year 2026 (FY26) coming in at RM6mil, accounting for only 34.7% and 27.8% of Public Investment Bank’s and consensus full-year estimates, respectively.

The research house reckons that the impact is largely one-off and project-specific, and should normalise in the coming quarters upon completion.

“Nevertheless, we also factor in a structural margin impact from the expanded sales and service tax scope effective September 2025, as certain pre-existing contracts are unable to fully pass through the incremental tax cost at this stage,” it said.

Historically, the company’s project net margin has been above 10%, depending on project complexity, scale and scope, Lim says.

PublicInvest Research has revised its FY26 to FY28 earnings forecasts lower by 21%, 6% and 6%, respectively.

It maintains its “neutral” call but lowers its target price (TP) to 51 sen from 54 sen following the earnings revision, based on 15.4 times 12-month forward earnings per share (EPS) of 3.31 sen.

Margin execution remains the key swing factor, it says.

At last look, the stock was at 35 sen apiece.

Still positive

Lim, who controls more than 60% of the company, says he remains “positive” on the company, particularly its traditional businesses of designing and installing industrial process equipment and plants.

“We still have a lot of work within the power segment and have bid for more. We are getting a lot of maintenance and replacement jobs,” he says, adding that the country’s growing data centre (DC) sector should also keep the company busy.

That said, Lim admits that the current soft market sentiment will continue to be a challenge for the group.

“Even industries such as oleochemicals are experiencing a prolonged soft patch due to oversupply and weak demand.

“Not everything is rosy now and big projects are few and far between these days. Given the current sentiment, we are not expecting development to grow by leaps and bounds, but we remain busy,” he adds.

In its update on the company, Kenanga Research expects Kawan Renergy’s earnings to recover in the third quarter (3Q), as the majority of the Sabah project’s cost overruns had already been incurred during the quarter.

The group’s current order book stands at RM128mil, of which RM71mil comprises recently secured purchase orders expected to provide earnings visibility from the 3Q onwards, it says.

The brokerage also notes that, following the company’s “earnings surprise”, it has revised its margin assumptions downwards, primarily to reflect higher energy costs stemming from the Middle East conflict, as well as increased subcontractor costs.

This results in a 29% cut to its FY26 earnings forecast and a 23% reduction for FY27.

Some 51% of the company’s FY27 revenue is dependent on its existing order book, which may be susceptible to higher costs, it warns.

Accordingly, it has reduced its gross margin assumption by circa 20 percentage points from its previous forecast.

“While we understand the substantial cost element has already been largely incurred during the quarter, we do not have additional clarity on the claim under variation orders for the additional work scope.

“As such, we take the view of no recovery at this juncture,” Kenanga Research says.

The research house nevertheless maintains its “outperform” call on the stock but has lowered its TP to 57 sen from 73 sen, based on 12 times FY27 EPS.

For the six months ended June 30, Kawan Renergy posted a net profit of RM6.5mil, compared with RM9.8mil in the same period a year earlier.

Revenue stood at RM90.2mil, compared with RM60.3mil previously.

For its 2Q26, revenue was mainly supported by a stronger contribution from the RE and co-generation segment, which grew 15.6% quarter-on-quarter (q-o-q) and 278.4% year-on-year (y-o-y) to RM25.5mil.

PublicInvest Research points out that the segment accounted for 55.6% of total revenue, driven by contract recognition in line with project progress milestones.

Meanwhile, revenue from industrial process equipment declined 19.2% q-o-q and 15.4% y-o-y to RM13.3mil. Process plants revenue improved 14.4% q-o-q to RM6.2mil, although it remained 24% lower y-o-y.

The research house notes that the company’s revenue mix has become increasingly skewed towards RE and co-generation, with quarterly revenue and margin volatility largely dependent on the timing and stage of project recognition.

In its latest annual report, Kawan Renergy says the group’s medium to long-term strategy is centred on building recurring income streams from RE assets, particularly through power generation projects.

It sees “strong potential” arising from the implementation of the National Energy Transition Roadmap initiatives and the continued growth of DC developments in Malaysia.

The company aims to position itself as a clean energy and RE partner, rather than merely an equipment supplier.

Kawan Renergy operates through three main subsidiaries, namely Kawan Engineering Sdn Bhd, Kawan Green Energy Sdn Bhd and Magenko Renewables (Asia) Sdn Bhd.