KKB Engineering (KKB) announced on Bursa Malaysia yesterday that its associated company, Oceanmight SB (OMSB), has received Petronas’ approved supplier licence under the category “OFFSHORE FACILITIES CONST-MAJOR ONSHORE FABRICATION” (Supplier Code: SO2020100. This is subject to the terms and conditions to stipulated by the licence, which is valid for three years up to 2016.

Big step into O&G sector. Although the announcement did not disclose many details, qualifying as as one of Petronas’ licensed suppliers is a big step forward for KKB’s O&G ambitions. We learnt that a company with a valid licence is allowed to supply goods/services to the upstream O&G sector in Malaysia as well as serve the national oil corporation’s downstream needs, including maritime activities. Examples of Petronas-licensed companies are PCSB, MISC and other Petronas subsidiaries and associates. In contrast, a company with a valid registration (instead of licence) is only allowed to supply goods/services to Petronas’ downstream activities (excluding upstream) as well as maritime activities.

OVERWEIGHT on O&G sector. Our research house has an OVERWEIGHT recommendation on the O&G sector. We believe that 2013 will be a bright year for Malaysia’s oil & gas industry as jobs visibility improves. We expect Petronas to spend an average RM60bn per year in the next four years in order to meet its RM300bn five-year capex plan, on which the oil corporation spent RM63.4bn in 2012. As this high capex injection from Petronas will charge up the local O&G sector, we are positive on KKB’s upcoming involved in the lucrative O&G sector.

Reiterate BUY, with RM1.75 FV. We are positive on KKB due to: (i) the company’s strong presence in Sarawak, which will allow it to ride on the rising wave created by SCORE’s development, (ii) its sizeable secured contracts amounting to RM375.5m which will propel the company’s earnings momentum in FY13F. In fact, this latest announcement will only brighten KKB’s outlook further. Nevertheless, since the announcement did not contain many details, we prefer to keep our valuation unchanged for now, with our FV remaining at RM1.75. that said, any further participation in the O&G sector may represent a rerating catalyst for KKB Engineering. Maintain BUY.

Source: RHB