KKB Engineering’s 60.8%-owned subsidiary in the oil and gas division i.e. OceanMight Sdn Bhd (OMSB) has so far demonstrated its capability to win contracts after winning RM226m out of the RM370m worth it was said to have tendered. The tenders, we understand, were for six offshore structures’ fabrication projects in Sarawak. To recap, it is one of the seven licensed oil and gas fabricators by Petronas. We are encouraged by the improving prospects especially its oil and gas business given the tough trading environment currently. More importantly, this is also signalling that KKB’s utilization of the fabrication should be running at more optimized levels going forward with more jobs in hand. All told, we still maintain our Neutral call and target price (TP) pegged at c.0.9x to book value, suggesting fair value of RM0.95 until we see a more convincing earnings recovery.

• Investment in Oil and Gas fabrication yard. To recap, KKB has invested more than c.RM115m in modern and automated heavy machineries and equipment including covered fabrication workshop in its oil and gas offshore fabrication yard. The yard is located near to private deep-water jetties with load-out capacity of up to 30,000 metric tonnes of fabricated structures. We reckon that KKB’s yard can differentiate itself by being located in Sarawak while also being a mid sized fabricator not saddled with high fixed costs. We understand that it has completed four fabrication projects worth c.RM100m so far. We understand that the Group’s focus for the next few years is to expand in the oil and gas sector as evident by its move that increased the stake in OMSB from 43% previously to 60.8%. In 2018, it has plans to spend up to RM20m to fund the oil and gas expansion.
   
• As mentioned in our earlier report, with high operating leverage, we believe the Group’s earnings could see substantial improvements once its utilization of the yard reaches optimal levels. We understand that the largest oil and gas fabricator in Malaysia is MMHE, with c. 130,000 metric tonne capacity, and that it needs at least RM1bn worth of jobs to break-even, and hence we believe that KKB’s yard is close to break-even now and should be profitable once the jobs-in-hand improve to c.RM200m levels. So far, it reported that it has already secured RM226m worth of oil and gas fabrication jobs from Petronas.

Source: PublicInvest Research - 14 Sept 2018