- We reiterate BUY on KKB Engineering, with an unchanged fair value of RM2.05/share – a 5% discount to our SOP of RM2.15/share.

 - Its long-term prospects remain intact by virtual of its associate Oceanmight’s O&G fabrication potential in Sarawak, its dominant position in the structural steel engineering sector, and healthy balance sheet. Oceanmight is one of 8 Petronas-licensed fabricators nationwide and one of just two in Sarawak.

 - We understand it is still in the running for its RM960mil bids for fabrication jobs. We remain confident in its capability to secure a portion of the bids, earliest by 1QFY15. The bids include the one for Canadian player Talisman’s Kinabalu deep wellhead platforms, with an estimated value of between US$60mil and US$80mil.

 - However, there could be a delay in this particular award, as Talisman is in the midst of being acquired by Spain’s Repsol, although the contract could still be awarded before the expected completion of the acquisition by mid- 2015.

 - Upstream at the end of last year had reported KKB to be the frontrunner for the Talisman job. KKB was reportedly to be among eight Malaysian fabricators in the running to provide the services to Talisman for the fabrication of a 3,000-tonne platform, which includes the process modules.

 - Oceanmight is currently in the midst of undertaking its maiden RM14.5mil contract to fabricate a wellhead platform for a marginal oilfield. This contract is expected to be completed in March.

 - Our O&G new order assumption for Oceanmight is conservative at only RM80mil for each of FY15F and FY16F, and at RM130mil for FY17F. Our net profit margin assumption is at 14%-15%.

 - We expect KKB’s 4QFY14 and FY14 results next month to be in line with our estimates following the reduced scope of its structural steel job for the Pertama Ferroalloys’ plant, which had affected its 3QFY14 performance.

 - Its balance sheet remains healthy, with net cash of RM26mil. Valuation is undemanding as it is trading at a PE of just 8x against FY15F and FY16F earnings.

 - Risks include a slower-than-expected recovery in the provision of pipes and structural steel/engineering services. Management has said it is optimistic about its prospects within SCORE, with more rural water supply and infrastructure development activities in the pipeline.

Source: AmeSecurities