KKB’s  lacklustre  1HFY14  was  below  our  and  street  expectations. However, we are hopeful that the company may soon land its first O&G job  given  its  fabrication  license  from  Petronas  and  solid  track  record. Until  KKB  successfully  secures  more  new  contracts,  we  are  keeping our FY14/15 numbers for now. Maintain NEUTRAL, with our MYR2.38 FV pegged to a 12x FY15 P/E.
 
Poor 1HFY14. Thanks to higher pipe delivery, KKB Engineering’s (KKB) 2Q  earnings  doubled  q-o-q  and  brought  its  1HFY14  net  profit  to MYR11.4m,  which  represented  only  28.9%/25.0%  of  our/street estimates.  We  are  not  surprised  by  its  weak  results,  as  its  pipe manufacturing  business,  which  generally  has  lower  margins,  was  offset by  poor  contract  wins  in  the  fabrication  division.  KKB’s bottomline was also pressured by higher interest and depreciation expenses arising from the commissioning of its new fabrication yard at Lot 777.  

Still  scouting  for  oil  and  gas  (O&G)  jobs.  Since  its  associate  entity, OceanMight  SB,  became  a  licensed  supplier  of  Petronas  under  the category of onshore fabrication for offshore major construction, KKB has been  scouting  aggressively  for  O&G  job  opportunities.  Despite  our conservative  contract  win  assumptions  of  MYR25m/MYR100m  for FY14/15,  KKB  has  yet  to  secure  any  contracts  to  date.  Meanwhile, contract  flow  at  its  general  fabrication  unit  has  also  been  weak.  Its  last
major contract was an MYR227m order for mild steel pipes in Nov 2013, which  may  have  helped  make  up  for  the  shortfall.  However,  these products generate lower margins.  

Maintain NEUTRAL, MYR2.38 FV. Despite the poor 1H, we are keeping our FY14/15 earnings estimates unchanged for now, but may review our forecasts  should  the  company  land  no  new  contracts  in  the  next  1-2 months.  That  said,  we  believe  KKB’s  successful  track  record  of participating  in  and  completing  many  fast-track  fabrication  and  civil projects offers room for a potential upside surprise, if it wins a substantial O&G  contract  in  the  near  future.  With  that,  we  reiterate  our  NEUTRAL rating  on  KKB  with  a  MYR2.38  FV,  pegged  to  a  12x  FY15  P/E,  in  line with its fabricator peers’ valuation. We advise investors to keep  a  close watch  on  the company’s developments, as any substantial contract win could prompt 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