- We maintain BUY on KKB Engineering, with an upward revised fair value of RM1.91/share (vs. RM1.80/share previously) – a 5% discount (10% previously) to our SOP value of RM2.00/share.

- In its 2012 annual report, KKB chairman Dato Kho Kak Beng says given its expertise and its strategic fabrication yard in Muara Tebas, Kuching, the group stands ready to expand further into fabrication for the oil and gas sector in the near future.

- Its yard measures a total of 28.3ha, including an open yard of 16.2ha, with a clear river frontage along Sungai Sarawak, and is equipped with deep-water jetty facilities. In 2012, KKB more than tripled its yard capacity to 50,000 tonnes annually.

- KKB’s prospects have brightened considerably since a 43%-owned associate Oceanmight Sdn Bhd recently secured a 3-year Petronas-Approved Supplier licence for the category of “Offshore facilities Const-Major Onshore Fabrication.”

- It is now able to tender for offshore facility fabrication jobs, from oil majors as well as the full-service providers. According to our O&G analyst, Petronas would have to ramp up spending by 56% to RM71bil annually over the next three years – in order to meet its capex target of RM300bil over the 2011-2015 period.

- Though not yet incorporated into our forecasts, we expect the KKB associate to get a small slice of the O&G action over the next few years, given its strategic presence in Sabah and Sarawak. This is apart from its traditional steel structure fabrication and pipe manufacturing jobs in infrastructure and building projects. We also believe overseas jobs may not be ruled out.

- We understand that KKB is in the midst of planning for its next phase of growth, and the O&G associate will be upping the ante and could begin to bid for jobs by 2H13.

- We also understand that as at end-March, 2013, KKB’s tender book stood at ~RM230mil and it could be bidding for nearly ~RM270mil worth of jobs, including pre-qualified ones, in 2Q. The results of the tenders would likely be known in 2H. For now, we maintain our new job assumption at RM300mil for FY13F.

- It still has an estimated RM330mil-RM350mil worth of jobs in hand after securing the bulk of its current order book of RM376mil in 2H12 – 2.3x of FY12’s revenue. We expect KKB to rebound in FY13, with a near tripling of earnings to RM56.6mil. We continue to like the stock for its attractive dividend yield of 6%-7%, aside from the blip last year.

Source: AmeSecurities