- We now have a BUY call on KKB Engineering, with an unchanged fair value of RM2.05/share – a 5% discount to our SOP of RM2.15/share – following the sharp fall of the share price after its latest quarterly result.

- The company yesterday announced that its subsidiary Harum Bidang Sdn Bhd had received a supply order from CMS Infra Trading Sdn Bhd, a subsidiary its major shareholder Cahya Mata Sarawak Bhd (CMS), for the supply and delivery of pipes worth RM10.1mil.

- The contract involves the supply of “mild steel polyurethane lined (MSPUL) pipes and specials” for the construction of the proposed Miri Water Supply Source Development (Phase 1: Upgrading of Bakong Intake and Pumping Main).

- The contract is for a 5-month period, for completion by March 2015. We had earlier downgraded KKB to a HOLD on the lack of construction/engineering jobs. Our new order assumption for the year is RM50mil.

- We believe the stock has been oversold given its dominant share of the steel pipe market in Sarawak (which is reportedly at ~60%) and the premium attached to its 43%-owned associate Oceanmight Sdn Bhd. KKB’s 3QFY14 result disappointed mainly due to the reduced scope of its structural steel job for the Pertama Ferroalloys’ plant in Samalaju. The original contract sum of RM171mil was reversed by RM15.5mil.

- Oceanmight is one of 8 Petronas-licensed O&G fabricators nationwide and one of just two in Sarawak to undertake jobs for the national oil company. KKB’s competitiveness in the local steel fabrication sector places it in good stead to win O&G jobs.

- Our job win assumptions for Oceanmight at RM80mil per annum for FY15F-FY16F and at RM130mil for FY17F are conservative. It is currently bidding for RM960mil worth of O&G fabrication jobs, the results of which could be known by 1QFY15. A 30% success rate could see it winning close to RM300mil worth of jobs – potentially translating into RM150mil each for FY15F and FY16F.

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

- We also believe KKB would continue to obtain support and workflow stemming from CMS, which holds a 20% stake in the company. Current valuation is undemanding at 11x FY15F EPS. Accumulate for the upside potential ahead.

Source: AmeSecurities