- We downgrade KKB Engineering to a Hold from Buy, with an unchanged fair value of RM2.50/share based on a 5% discount to SOP value.

- The stock has risen significantly after our earlier rerating, reaching its historic high of RM2.84/share in intra-day trade yesterday. The share price has more than doubled since trading at the year’s low of RM1.37/share on 21 January 2013.

- KKB yesterday announced a 9MFY13 net profit of RM30.5mil (+131% YoY) – representing only 56% of our FY13F estimate and 61% of consensus. The shortfall was largely due to a lower contribution from steel pipe manufacturing, which we estimate incurred a loss before interest and tax of RM0.8mil in 3QFY13. The division’s revenue fell by a sharp 63% QoQ and by 50% YoY to RM7.4mil.

- It declared an interim gross dividend of 2.5 sen/share comprising 0.5 sen tax-exempt and 2.0 sen at 25% tax. We maintain our earnings and dividends forecasts for now, potentially with a downside bias. We estimate that it currently has an outstanding order book of less than RM200mil. YTD, it has announced the securing of new jobs worth only RM50mil.

- In its notes, KKB says activities for both the engineering and manufacturing sectors are picking up steam and it is actively looking into new opportunities in structural steel fabrication activities for the O&G sector. It holds a 43% stake in Petronas licensed fabricator Oceanmight Sdn Bhd.

- O&G weekly Upstream recently reported that KKB is part of a consortium pre-qualified for the development of the offshore facilities for the Bergading field under the first phase of the North Malay Basin field. The turnkey contract is potentially worth US$1bil.

- KKB has teamed up with Hyundai Heavy Industries Co Ltd and Norway’s Aker Solutions ASA. The other two pre-qualified consortia are a JV between McDermott International Inc and TH Heavy Engineering and the other comprising Samsung Heavy Industries, Sapurakencana Petroleum Bhd and Ranhill Worley Parsons Sdn Bhd.

- The tender will run through May 2014 for an EPCIC contract tied to a central processing platform plus a wellhead structure. The winner will be required to carry out the fabrication of the wellhead platform locally. The final bids are expected to be made in February.

- KKB’s fabrication yard in 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 jobs. Valuation now looks rich, pending further confirmation of jobs ahead, particularly for the O&G venture.

Source: AmeSecurities