INVESTMENT HIGHLIGHTS

• KKB Engineering posted RM119.8m (+28.5%yoy) of revenue in 2QFY19

• Growth largely derived from its Engineering segment

• As of June 2019, outstanding orderbook stood at RM800m

• No change to estimates at this juncture

• Our valuation constitutes a NEUTRAL rating on the stock, with TP unchanged at RM1.47

KKB Engineering posted RM119.8m (+28.5%yoy) of revenue in 2QFY19. Accordingly, the cumulative quantum was posted at RM237.5 in 1HFY19, growing at +50.6%yoy from the same period last year. For the quarter (2QFY19) under review, the group reported PATANCI of RM5.5m (+>100%yoy), taking the cumulative number to RM8.7m (+>100%yoy) in 1HFY19. It constitutes 55% and 52% of our and market’s full year estimates. Whilst the numbers are expected, they are laudable in comparison to last year’s.

Growth largely supported by the Engineering segment. The segment grew its income (external) by +66.2%yoy to RM223.5m in 1HFY19. Civil construction and steel fabrication businesses represent a big portion of the division, which we expect to continue supporting earnings at least in the medium term. Notably, the construction segment has been supported by the progress works of Pan Borneo Sarawak.

About Steel Fabrication. Meanwhile, 2QFY19 revenue for steel fabrication was mostly recognized from the Wellhead Platforms for D18 Phase 2 project for Petronas. Based on the project’s scheduled completion date, we believe its contribution to FY19 bottom-line is likely to be significant. On top of this, we noted that the two new pipes laying projects (secured in February 2019) has already commenced works. Both contracts summed to a sizeable amount of RM110.8m. In consideration of this, we expect progress works to contribute positively to the group’s earnings until FY20.

As of June 2019, outstanding orderbook stood at RM800m. Based on the current progress rate, we believe the amount will last until 2HFY21. Over the 1HFY19, new works secured was recorded at RM189m, forming a sizeable portion of the current unbilled jobs. We noted that the new works clinched in 2019 was mostly awarded under the State Water projects. Total tenderbook as of June 2019 was RM602m, comprising RM162m for Manufacturing and Engineering sector and RM440m for Oil and Gas sector.

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

Downgrade to NEUTRAL. KKB’s share price has touched our TP of RM1.47 on 8th August 2019. We believe the momentum built up was reflective of the group’s encouraging prospect in Sarawak. Outlook in the near term should be well supported by the potential slew of infra jobs in the state. Moving forward, we expect KKB to derive benefits from the roll out of State Water Grid project worth RM2.8b, given its presence in the steel pipes industry. It stands a good chance of winning some contracts from the water projects, due to its long track record in pipe manufacturing and supplies. The company currently sits on approximately RM88.0m of cash reserves, putting it in comfortable position to clinch and operate new projects successfully. KKB has been actively bidding for the state water projects in 1H19, indicating that any upcoming awards from the project could potentially manifest towards the year end. In the near term, we expect the results to be within our expectations, supported by the progress billings for Pan Borneo Sarawak package. Given the strength shown in share price (it has risen by 64.4% on year to date basis), we believe a downgrade is warranted (without adjusting our valuation). Hence, we downgrade to NEUTRAL with unchanged TP of RM1.47. The upside risks to our call are 1) faster than expected progress in the construction division, and 2) sooner than expected state project awards. Moving forward, any retracement in share price should be seen as a chance to accumulate.

Source: MIDF Research - 16 Aug 2019