Disappointing quarter. KKB's 2QFY12 net earnings of RM3.7m (-51.9% q-o-q, -68.4% y-o-y) disappointed, even in view of the significantly slashed estimates. The cumulative 1HFY12 net profit of RM11.4m met only 28% of our full-year estimates. The timid 2Q results were mainly due to the decline in profit contribution from the engineering segment owing to slower replenishment of new contracts. The segment's steel fabrication and hot dip galvanizing units recorded drops in revenue of 36.9% and 22.7% respectively y-o-y. Although the manufacturing segment saw significant improvement, thanks to the steel pipes manufacturing business, the growth was still not good enough to offset the decline in the engineering segment.

2H may be better - hopefully. Although the 1H results were disappointing, we think that KKB's 2HFY12 numbers may improve as the contract flows have been picking up recently. In July 2012, KKB bagged two contracts worth a total of RM199m, comprising: i) supply of steel pipe piles worth RM28m, and ii) a RM171m contract for structural steel and cladding works from Pertama Ferroalloys SB, formerly known as AML Manganese (M) SB. In view of the possibility of revitalizing activities in the Sarawak Corridor of Renewable Energy (SCORE), especially at Samalaju industrial Park, we think KKB may be able to rope in more contracts in the near term to bolster its earnings in FY13.

Maintain NEUTRAL, but rerating possible. Although KKB has started to replenish its order book, we think the contracts may contribute meaningfully only in FY13 but not FY12. That said, we prefer to trim our FY12 and FY13 earnings estimates by 19% and 17% respectively, for the sake of prudence. This aside, KKB may possibly venture into the lucrative O&G sector once its JV agreement with Brooke Dockyard progresses smoothly. Thus, we are maintaining our NEUTRAL recommendation in view of the potential rerating catalyst, but at a higher FV of RM1.62 as we roll over our FV to 10x FY13 PE.

Source: OSK