KEY INVESTMENT HIGHLIGHTS

• KKB Engineering has successfully clinched several awards, carrying a sum of RM60.9m

• Package 3A and 3B are mainly construction contracts, with the former to run immediately (October 2019) until completion in December 2020

• KKB’s new replenishment in 2019 currently stands at RM277.4m

• We upgrade to BUY with TP adjusted to RM1.52

KKB Engineering has successfully clinched several awards, carrying a sum of RM60.9m. The main job comprises construction and completion of water supply project, covering the area from Kota Samarahan to Sebuyau. The two packages won were dubbed Package 3A and Package 3B, which we believe to form part of the Water Grid Project Phase 1. In the same announcement, KKB has also received orders for the additional supply for MSCL Pipes and Specials, placed by Laras Jaya Engineering, Cipta Wawasan Maju and Cityon Development.

Duration of contract. Package 3A and 3B are mainly construction contracts, with the former to run immediately (October 2019) until completion in December 2020. Meanwhile, the latter will take a slightly extended period of 16 months (compared to package 3A; 14 months) to run from end October 2019 until February 2021. Meanwhile, the supply orders are to be delivered in stages within the 1H2020.

KKB’s new replenishment in 2019 currently stands at RM277.4m which is already ahead of our expectation at RM250m this year. As of last reported, we believe that KKB’s outstanding orders amounted to RM0.7b, which is enough to keep it busy until FY21. The bulk of that orders was derived from PBH Sarawak job, which was awarded in July 17. With tenders still ongoing, we will not be surprised if KKB achieved to hit RM300m mark of new orders this year.

The termination on Pan Borneo PDP was seen as a minor setback. Despite the risk, management sees this situation as manageable with construction work to progress as usual. While we note that works would likely continue with no major interruptions, we have made some adjustment to our progress work assumptions (to be conservative). Accordingly, we revised down our earnings for FY19 and FY20 by -6% and -6% respectively.

According to a news source, KKB’s Ocean Might has bid for three contracts for fabrication of offshore structures worth about RM355m. We believe that the outcomes will likely be known by early 1Q20, taking into account that bids were submitted in 3Q19. Two of the bids were for EPCC of fixed offshore structures and the third was a sub-contract package. Previously, Ocean Might was awarded and completed on time four fabrication contracts for offshore structures worth about RM250m between 2014 and 2017. The most recent completion was for Petronas D18 Phase 2, which was delivered ten days ahead of time. Being one of the two companies in Sarawak awarded frame agreement by Petronas, its track record in the segment is recognized. Building a market share in this segment (Oil & Gas Offshore Facilities Construction and Major Onshore Fabrication) is not a stroll in the park, but KKB’s Ocean Might has proven that its move is turning fruitful.

We upgrade our call to BUY, with TP adjusted to RM1.52, implying PER of 21x on FY20 EPS. Despite our revision in earnings, the TP we accorded is pegged to a higher PBV of 1.2x (+1 STD of 1-year average) that is reflective of (1) the group’s growth prospect in the Oil & Gas Engineering segment, (2) recovery in earnings margin, and (3) niche expertise to benefit from the state’s long-term master plan. KKB’s position is at an advantage to benefit from the recent federal allocation in Budget 2020, with a large chunk being channeled for Sarawak Water Supply Project. As a sole water pipe manufacturer in Sarawak with track record in construction works, the facets of KKB’s expertise are well set to be tapped. Meanwhile, the group’s entry into the oil and gas segment should not be overlooked, as it continues to strengthen its track record as well as market share. Central to this is the milestones achieved thus far which would help to support its longterm growth. From a valuation perspective, we think that the current share price presents an attractive entry point. Downside risks to our call are (1) slower than expected progress billings, (2) surprise contraction in margin, and (3) slowdown of job flows.

Source: MIDF Research - 22 Oct 2019