KKB’s  weak start to  FY14 was  way below  our  and street  expectations. However,  we  continue  to  like  the  company  as  its  fabrication  licence from Petronas may lead to  more O&G jobs soon. Meanwhile, until more new  contracts  justify  a  re-rating,  we  are  paring  our  FY14/15  numbers but keeping our NEUTRAL rating. Our FV is trimmed slightly to MYR2.38(from MYR2.39) as we roll over our valuation to 12x FY15 P/E.

• Poor start to FY14.  KKB  Engineering’s  (KKB)  net profit of MYR3.8m in1QFY14  only represented  7.4%/6.4% of our/street expectations. We are not entirely surprised at the disappointing results – poor contract win rate for fabrication  division was barely compensated  for  by  its manufacturing business,  which  generally  has  a  lower  margin.  Furthermore,  the commissioning of its new fabrication yard at Lot 777 also translated  into higher  interest  and  depreciation  expenses  that  further  pressured  its bottomline, pending a significant fabrication contract win.
• Scouting  for  oil  and  gas  (O&G)  jobs.  Since  its  associate  entity, OceanMight  SB,  became  a  licensed  supplier  to  Petronas  under  thecategory  of  onshore  fabrication  for  offshore  major  construction,  KKB’smanagement has been  scouting  aggressively for O&G  job  opportunities.Nonetheless,  we  decide  to  lower  our  contract  win  assumptions  for FY14/15  to  MYR25m/MYR100m  from  MYR100m/MYR120m respectively  as  it  has  yet  to  win  any  contracts  to  date.  Meanwhile,contract  flow  at  its  general  fabrication  unit  has  also  been  weak,  but  a MYR227m order for mild  steel  pipes  in Nov 2013  helped  to  compensate for  the  shortfall.  However,  these  products  generate  a  lower  margin, which prompted us to lower our margin assumption by 3% in FY14.
• Reiterate NEUTRAL,  MYR2.38  FV.  We pare our FY14/15 estimates by 23.2%/8.4%  to  MYR39.4m/MYR51.2m  respectively.  However,  we maintain NEUTRAL on KKB as its successful track record of participating in and completing many fast-track fabrication and  civil projects  suggests there is  a  possibility of an upside surprise if it wins a substantial O&G contract in the near future.  We tweak our FV slightly  lower  to  MYR2.38 from MYR2.39  as  we roll  over our valuation to FY15 on the same P/E multiple  of  12x,  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.

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

Source: RHB