We remain  positive on KKB Engineering (KKB) for its strong presence and  good  track record in fabrication works  in Sarawak.  The company’s potential  involvement  in  oil  &  gas  (O&G)-related  contracts  remains  a positive re-rating catalyst. KKB, which has  unbilled sales of MYR310m as at March 2013,  is actively bidding for more contracts.  Maintain BUY, with an unchanged MYR2.28 FV.

- Structural steel the main core.  Structural steel remains  the main core business division for KKB,  as  its  profit margins  are  more lucrative  than that of  steel pipes  and  LPG cylinders. KKB  has  a good track record in completing quality structural steel works under fast  track projects,  which have a higher  profit margin than normal structural steel works.  This  has given KKB the competitive edge to remain one of the largest fabricators in Sarawak.

-  OceanMight  –  key  to  O&G  sector.  KKB’s  associate  company, OceanMight, has been licensed by Petronas back in March to undertake major  fabrication  contracts  for  onshore  and  offshore  activities.  This  is seen as a key driver for KKB to venture into the O&G sector, as well as a re-rating catalyst for the company.

- Getting busier in future.  KKB guided that  it  is currently prequalified for five  major  O&G  projects,  which  we  are  hopeful  that  it  will  be  able  to secure its first Q&G contract  by 1QFY14.  The company also highlighted that  its  unbilled sales amounted to MYR310m,  as at March 2013,  which should  keep them busy for the next 18 months.  KKB is currently bidding for MYR226m worth of contracts. 

- Maintain  BUY.  As  Petronas  is  expected  to  ramp  up  its  capex  in  the near-term,  we see good potential for KKB to secure some O&G-related contracts.  In  view  of  its  strong  presence  in  Sarawak,  coupled  with  our bullish  view  on  Sarawak’s  developments,  especially  in  the  Sarawak Corridor  or  Renewable  Energy  (SCORE)  region,  we  are  keeping  our BUY  recommendation  on  KKB,  with  our  FV  unchanged  at  MYR2.28, pegged to a 10x FY14F P/E.

Source: RHB