KKB’s  FY13  earnings,  weighed  down  by  an  operating  loss  from  its engineering unit in 4Q13, missed our and consensus estimates. Still, we continue  to  like  the  company  as  its  fabrication  licence  from  Petronas may lead to O&G jobs soon. However, until more new contracts justify a re-rating,  we  maintain  NEUTRAL  and  lower  our  FV  to  MYR2.39  (from MYR2.74) as we pare our FY14/15 numbers by 12.7/15.9% respectively.

• FY13 results  disappoint.  KKB Engineering (KKB)’s  FY13  profit  surged 63.3% y-o-y  to MYR33.5m  but  this was still  26.8/34.4%  below our and street  expectations  respectively. Its  manufacturing  businesses regained steam  as  expected,  booking  an  operating  profit  of  MYR5.1m  in  4Q13,thanks to higher  steel pipe products  sales. However, its  steel fabrication and  construction  division  recorded  a  MYR7.8m  operating  loss  in  4Q, partly due to  the  lower  number of  jobs recognised, but we also  seeking further clarification from its management on this.
• Eyeing  O&G jobs in 2014.  Management has  been  scouting for  oil and gas  (O&G)  opportunities  after  its  associate  entity,  OceanMight  SB,became  a  licensed  supplier  to  Petronas  under  the  category  “onshore fabrication  for  offshore  major  construction”.  That  said,  we  lower  our contract  win  assumptions  for  FY14/15  to  MYR100m/120m  from MYR150m/200m  respectively  as  it has  yet to win  any contracts to date. Contract  flow  at  its  general  fabrication  unit  has  also  been  weak. However, as it  won a  MYR227m order for  mild  steel  pipes  in Nov 2013 that far exceeded  the  MYR50m we  assumed  in our financial model,  we fine tune our estimates for its pipe-making division.
• Reiterate  NEUTRAL,  FV  dips  to  MYR2.39.  Overall,  we  pare  our FY14/15  estimates  by  12.7/15.9%  to  MYR51.4m/55.9m  respectively  in view of the thinner margins from  steel  pipes despite the higher sales, as well as our lower revenue estimate for the higher-margin fabrication unit.We  retain  our  NEUTRAL  call  on  KKB  as  its  record  of  successfully participating  in  and  completing  many  fast-track  fabrication  and  civil projects  suggests  there  is  possibility  of  an  upside  surprise  if  it  wins  a substantial O&G contract  in  the  near future. Our  new  MYR2.39  FV  (from MYR2.74)  is  derived  from  a  12x  FY14F  P/E  in  line  with  its  fabricator peers valuation.  We advise investors to  closely  monitor the company’s developments, as any substantial contract win may justify a re-rating.

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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