KKB’s  associate  first  O&G  contract  win  suggests  that  more  lucrativeO&G fabrication works may be forthcoming should this contract be well executed.  However,  the  MYR14.5m  contract  is  still  below  our  FY14 target, and KKB faces the risk of an earnings cut if its near-term results remain  disappointing. That said, we change  KKB to TRADING BUY  and raise  its  FV  to  MYR2.78  (from  MYR2.38)  as  this  momentous  O&G contract win may boost market sentiments. 

First O&G contract.    KKB Engineering (KKB) has been  scouting for oil and  gas  (O&G)  opportunities  after  its  associate,  OceanMight  SB,became  a  Petronas-licensed  supplier  in  the  “onshore  fabrication  for offshore  major  construction”  category  in  March  2013.  Yesterday,  the company told  Bursa Malaysia  that OceanMight had  received a Letter of Award from 2H Offshore Engineering  SB for the provision of fabrication, hook-up  and  commissioning  services  for  the  Tanjong  Baram Wellhead Platform.  The  commencement  period  of  this  fabrication  project  is  from September to March 2015.

Important  milestone.  Although  the  contract  is  only  worth  MYR14.5m, we  think  this  is  KKB’s  critical  breakthrough  into  the  O&G  industry. Meanwhile, we make no changes to our estimates as the project value is still below  our contract win  target  of  MYR25m in FY14.  However, we do not discount the possibility of its associate winning more O&G fabrication jobs  that  may  exceed  our  assumption  of  MYR100m  in  FY1 5.  The successful  execution  of  this  project  will  be  an  important  testimony  to KKB’s  capability  in  winning  more-cum-bigger  O&G-related  fabrication works in the future.   

Upgrade  to  TRADING  BUY.  We believe  the  news  of  KKB  winning  an O&G  contract may excite the  market, hence driving its near-term share price  performance.  Nonetheless,  we  prefer  to  be  prudent  as  KKB’s 1HFY14  profit,  which  was  announced  last  month,  only  accounted  for28.9%  of  our  full-year estimates,  suggesting  a  potential  earnings  cut  if 3QFY14  results  remain  disappointing.  Therefore, we  are  only  changingKKB’s  recommendation  to  TRADING  BUY  (from  Neutral).  We  raise  its FV  to MYR2.78 (from MYR2.38),  as  we revise  up our target P/E to  14x (from 12x) of FY15 estimates, which is at the lower end of its O&G peers’P/E range of 14x to 25x.

Source: RHB