INVESTMENT HIGHLIGHTS

• Revenue upped +82.4%yoy in 1QFY19

• Earnings surge largely supported by engineering division

• Revenue from manufacturing was minimal in 1QFY19, reported at RM8.7m

• We make no changes to our estimates, as the quarterly earnings met our expectation

• Maintain BUY with adjusted TP of RM1.47

Revenue upped +82.4%yoy in 1QFY19. Likewise, earnings followed suit with PATANCI rising by +134.9%yoy to RM3.2m. The figure corresponded to 20.1% of our full year estimate. However, it lagged consensus’ accounting for only 16.6%.

Earnings surge largely supported by engineering division. The division made up 92.6% of the company’s total revenue which amounted to RM117.8m. In 1QFY19, the progress billings mainly stemmed from civil construction and steel fabrication projects namely the Pan Borneo Highway and Wellhead Platforms for D18 Phase 2. Moving forward, we expect contributions from both projects to maintain its traction in FY19.

Revenue from manufacturing was minimal in 1QFY19, reported at RM8.7m (vs RM13.4 million in corresponding period last year). Revenue contraction was largely due to slower offtake of pipes from CMS Infra Trading Sdn Bhd. In March 2019, the company was awarded projects for the supply of MSCL Pipes to Jabatan Bekalan Air Luar Bandar Sarawak implemented under the Sarawak Water Supply Grid Programme. However, we noted that billings from these newly won projects will only start in 2QFY19 onwards. Moving forward, we are likely to see the demand for steel pipes to remain strong on the back of forthcoming projects planned under the Sarawak Water Supply Grid Programme. We learned that the company is aggressively participating in biddings which relate to infrastructures and steel works. Accordingly, these new tenders will likely be awarded in 2HFY19.

Maintain forecasts. We make no changes to our estimates as the quarterly earnings met our expectation.

Maintain BUY. Our TP was adjusted higher to RM1.47. It was arrived after pegging a PBV multiple of 1.1x to KKB’s FY20BVPS of RM1.35. The multiple ascribed is +1std higher than its 2-year average, which we think is justified given the up-cycle in Sarawak’s infrastructure outlook .The plethora of projects set in the state has become a significant factor to our optimism, which has painted a positive macro view on the prospect of the state’s infra players. We have identified KKB Engineering as being one of the potential beneficiaries, with its toehold in steel pipe business expected to reap benefits from Sarawak water program. The downside risks to our call are (1) slower than expected progress in the construction division, and (2) a delay in state project awards.

Source: MIDF Research - 23 May 2019