KKB’s 9M13 earnings missed our and consensus estimates, weighed by its  manufacturing division’s poor sales  in 3Q13.  That said, we continue to like  the company   as  its existing orderbook will keep it busy for the rest  of  2013,  while  its  fabrication  license  from  Petronas  may  lead  to O&G jobs soon.  However,  until more new contracts justify a re-rating, we downgrade KKB to NEUTRAL (from Buy) but keep its FV at MYR2.74.

Results  slightly  beneath  estimates.  KKB  Engineering  (KKB)  posted 3Q13  earnings  of  MYR7.1m  (+306.4%  y-o-y;  -40.4%  q-o-q).  Its annualised  9M13 earnings, while slightly below  our estimate, were  well below  street’s  expectation.  The  company’s  steel  fabrication  and construction  businesses  regained steam,  booking an operating profit of MYR19.1m  in  3Q13.  However,  its  manufacturing  division  recorded  a marginal  loss  during  the  quarter,  which  we  believe  was  mainly  due  to lower steel pipes sales. That said, we retain our estimates as sales of its manufacturing products may pick up in 4Q13.

Working  to  get  new  jobs.  We  reckon  the  existing  projects  will  keep KKB  busy for the remainder of 2013, with  some  of the jobs spilling over to  next  year.  The company  has been  aggressively scouting  for  oil  and gas  (O&G)  opportunities  after  its  associate  entity,  OceanMight  SB, became  a  licensed  Petronas  supplier  under  the  category  of  “onshore fabrication for offshore major construction”. We expect the group to win MYR100m/150m worth of O&G-related contracts in FY13F/FY14F. Apart from that, we  assume its  general fabrication contract win rate at  30% for its bids of MYR430m worth of jobs (as of June).

Downgrade  to  NEUTRAL.  KKB  has  a  proven  record  of  successfully participating  in  and  completing  many  fast-tracked  fabrication  and  civil projects. Management’s strong capability lends support to its chances of winning  new jobs.  However,  as its  share price  has almost doubled  YTD (before it  secures  any O&G jobs)  and  its  3Q results fell slightly  short of market expectations,  we  are downgrading the stock to NEUTRAL  (from Buy).  Our  MYR2.74  FV  is  derived  from  a  12x  FY14F  P/E.  We  advise investors  to  monitor  the  company’s  development  closely,  as  any substantial contract win may justify the next re-rating, since our valuation 
is still at a discount to KKB’s O&G peers. 

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SWOT Analysis

Company Profile
KKB Engineering is primarily involved in steel fabrication, civil construction and the manufacturing of steel pipes and liquefied petroleum gas (LPG) cylinders.

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Source: RHB