- We maintain HOLD on KKB, but with a lower FV of RM2.05/share (vs. RM2.50/share previously) – a 5% discount to our SOP of RM2.15/share (RM2.63/share previously), on the lack of engineering jobs that will be mitigated by aggressive bids for O&G jobs.

- We cut our FY14F-FY16F earnings by 34%-35%, and introduce FY17F net profit at RM57mil. We now project new orders at RM250mil-RM280mil/annum (vs. RM300mil/annum previously) for FY15F-FY17F. We have cut our FY14F new order assumption to just RM50mil.

- We also have a more conservative RM80mil/annum job wins for Oceanmight for FY15F-FY16F vs. RM130mil- RM150mil previously, and at RM130mil for FY17F. Our net profit assumption for Oceanmight is at 14%-15%.

- KKB posted a 3QFY14 net profit of just RM1.2mil (-84% QoQ; -83% YoY), bringing the total for 9MFY14 to RM12.6mil (-59% YoY) – far below our and consensus’ earlier full-year expectations of RM57mil and RM46mil, respectively. No dividend was declared.

- Apart from fewer engineering jobs, it was affected by a RM15.5mil adjustment in revenue upon the finalisation of structural steel and cladding works in Bintulu. We believe this to be a one-off event related to the RM171mil (original sum) job for the Pertama Ferroalloys’ plant in Samalaju. It could be due to a reduced scope of the plant. This was mitigated by the strong performance of the pipe manufacturing division.

- Contributions came from structural steel works for the LNG Train 9 Project, structural steel for the SAMUR project, structural steel works for the proposed University College of Technology Sarawak in Sibu, and the supply of steel poles and the infrastructural works in Samalaju.

- Its unbilled sales stands at RM160mil, which would last 12 months, excluding its O&G associate Oceanmight’s RM14.5mil maiden fabrication job that started last month and which is on track to be completed next March.

- We understand that as of now, KKB is bidding for ~RM130mil worth of conventional jobs, while Oceanmight’s tender book is at RM960mil. The results of a major portion of the tenders could be known by 1QFY15. All in, the tender book totals over RM1bil and assuming a 30% success rate, new orders for FY15F could reach over RM300mil, including the O&G fabrication jobs.

- Apart from the potential in Oceanmight, we believe there are still plenty of infrastructural works for KKB in the months ahead, particularly involving rural water supply jobs as the state pushes its rural development agenda.

Source: AmeSecurities