-  We maintain BUY on KKB Engineering, with a higher fair value of RM2.50/share – a 5% discount to our upward revised SOP value of RM2.64/share and at an implied PE of 12x FY13F EPS.

-  This follows the release of its 1HFY13 result and the incorporation of its oil and gas associate earnings from FY14F onwards.

-  Its 1HFY13 net profit of RM23.4mil (+104% YoY) represented only 41% of our forecast of RM56.8mil, while revenue made up 45% of our projection. KKB could still make for the shortfall as progress billings are stepped up in 2HFY13F on the advancement of its engineering jobs towards the yearend.

-  No dividend was declared. We continue to expect an interim dividend of at least 5 sen/share and a final dividend of the same quantum, for a payout ratio of ~34%.

-  As expected, its engineering and construction division continued to contribute significantly, accounting for 54% of EBITDA in 1HFY13 vs. 57% in 1QFY13 and only 27% in FY12.

-  EBITDA margins for the manufacturing and engineering & construction segments held up at 47% and 21%, respectively, vs. 48% and 20% in 1QFY13.

-  In its notes, KKB again highlighted its readiness to undertake larger and more complex structural steel fabrication jobs, particularly in major onshore fabrication for offshore facilities in the O&G sector, in collaboration with its associated company Oceanmight Sdn Bhd.

-  We now assume that the associate would secure jobs worth RM120mil for FY14F, with a net margin of 19% and KKB’s share of earnings at RM9.7mil.

-  At the same time, we have cut our new order assumption for KKB itself to RM200mil for this year (from RM300mil previously). YTD, it has secured only RM50mil of new orders. Notably, it could also earn from the lease of yard space to the associate. All in, we trim our earnings forecasts by 2%-4% for FY13F-FY15F.

-  As at end-June 2013, its outstanding order book totalled RM250mil for the next 15 months, while its tender book now totalled RM180mil, excluding the bids by Oceanmight.

-  Its fabrication yard in Muara Tebas, Kuching, has an installed pipe-manufacturing capacity of 15,000 p.a., and it has set aside an additional capacity of 35,000 tonnes for the impending O&G fabrication jobs. KKB’s valuation remains attractive, currently trading at only 9x-11x FY13F-FY15F earnings.

Source: AmeSecurities