- We maintain HOLD on KKB Engineering with a lower unchanged fair value of RM2.50/share – a 5% discount to our SOP value of RM2.63/share.

- KKB yesterday announced a 2QFY14 net profit of RM7.6mil (-37% YoY; +100% QoQ), bringing the 1HFY14 total to RM11.4mil (-51% YoY) which was below expectations. No dividend was declared.

- The 1H earnings represent only 20% and 25% of our and consensus forecasts, respectively. Revenue accounted for 31% of our forecast. While a significant improvement QoQ, the 2Q performance could not make up for the shortfall.

- The current outstanding order book stands at ~RM250mil (1.1x FY13 revenue), which will last the next 12 months.

- We understand that as at end-June, its O&G associate Oceanmight had tendered for ~RM790mil worth of jobs. The bids for the traditional segments (engineering and manufacturing) stand at ~RM91mil.

- News on some of the bids will likely emerge within this half of the year, while we can expect more tenders to be undertaken during the course of the second half.

- For 1HFY14, the engineering division performed in line with expectations, with revenue making up 50% of our forecast, while EBITDA margin rose by 5ppts QoQ and 13ppts YoY.

- Contributions came mainly from the fabrication of structural steel works for the Petronas LNG Train 9 and the SAMUR projects. Both these projects, collectively valued at ~RM50mil, are scheduled to be completed by year-end.

- Pipes’ 1HFY14 revenue lagged behind, at only 27% of our full-year estimate. The 2Q result vastly improved QoQ, with revenue and EBITDA up by >60% and ~200%, respectively. EBITDA margin improved by 10ppts to 22% in 2Q.

- We believe the bulk of manufacturing contributions came from the RM227mil pipe supply contract with CMS Infra. The contract is expected to be completed by 3Q15. We believe there might be VOs that would raise the value of the contract. This would mitigate the palpable slowdown in engineering jobs.

- In its note, KKB said as a result of lower volumes and increasing costs, the board is “cautious” that the group’s outlook for the remaining part FY14 will prove to be challenging.

- We maintain our numbers for now. At the current level, we believe the O&G prospects have been priced in.

Source: AmeSecurities