INVESTMENT HIGHLIGHTS

• Leading steel fabricator in East Malaysia

• Second fabricator licensed under Petronas in East Malaysia

• Orderbook burn rate until 2020

• FY17 earnings back in the black

• Announced dividend of 2 sen per share

• Initiate with a BUY on a target price of 1.15 per share

Leading steel fabricator in East Malaysia. With over 55 years of experience in the steel fabrication industry, KKB Engineering (KKB) is an established player with significant market share in East Malaysia. Amongst the completed projects to-date by KKB is the Ferro Alloy Complex at the Samalaju Industrial Park, the University College of Technology Sarawak, Sibu (2013), the Borneo Convention Centre, steel structures for Petronas Tank 7 New Jetty-PAF Project and LNG Train 9 Project, and the upgrades or redevelopments of several airports, namely, Labuan Airport, Kota Kinabalu International Airport, Kuching International Airport and the Low Cost Carrier Terminal (LCCT) of Kota Kinabalu.

The second fabricator licensed by Petronas in East Malaysia. In 2013, KKB’s 60.81% owned subsidiary, OceanMight Sdn Bhd (OMSB) obtained a Petronas Approved Supplier licence for the category of “Offshore Facilities Const-Major Onshore Fabrication”. Further venturing from onshore to offshore, OMSB operates in a fabrication yard measuring approximately 70 acres fully equipped with automated fabrication production line facilities. The yard also facilitates private deep water jetties located less than 5km from Sarawak river mouth with loadout capacity of up to 30,000mt of fabricated structure. Among the projects that OMSB has been involved with are fabrication, hook-up and commissioning services for the Tanjong Baram Wellhead Platform, the Engineering, Procurement and Construction (EPC) of the Wellhead Platform for Kinabalu Redevelopment Project and the EPC for Bunga Pakma Wellhead Riser Platform.

Secured orderbook until 2020. On 25 July 2016, KKB Engineering through its JV partner WCT (KKB-WCT) was awarded with a RM1.3b Pan Borneo Highway Sarawak project, thus, securing its orderbook until 2020. Including this project, as at end-December 2017, KKB has an orderbook of approximately RM900m which also consists of other steel fabrication projects.

Valuation

Initiate coverage on KKB with BUY and TP of RM1.15 per share. We initiate coverage on KKB with a BUY recommendation and target price of RM1.15 per share. Our target price is premised on a forward PBR19 of 1x, representing the average PBR over the past two years. We believe in KKB’s growth story and its potential to offer investors the opportunity to benefit from potentially volatile share price movements premised on project activity levels. Moving forward, with its quality orderbook and progressive profit recognition, we believe that the company will be able to sustain its earnings in the foreseeable future.

With more stable grounds in the oil and gas and the power industry, as well as its existing strong foothold in steel fabrication, we believe that KKB will be able to maintain a stable growth going forward. KKB’s strong foundation lies in its: (1) net cash position for the past three years; (2) vast experience in the steel fabrication industry; (3) potential benefit with exposure in the power and oil and gas sector and; (4) secured orderbook until 2020.

Source: MIDF Research - 20 Feb 2018