KKB’s 9M14  results  were  way  below  our  and  street  expectations.  We downgrade our rating to SELL (from Trading Buy) as we trim our target P/E  to  12x  FY15  and  cut  our TP  to  MYR1.38  (-29.5%  downside).  Due  to the  waning  hope  on  its  associate  unit  winning  more  O&G  contracts  in the  near  future  (on  weakening  oil  prices)  and  poor  contract  wins  for other divisions to-date, we are slashing our FY14/15 earnings numbers.  

Disappointing  results.  KKB Engineering’s (KKB) 9M14  net  profit  of MYR12.6m  represented  only  31.9%/27.3%  of  our/street  estimates.  We are not surprised by its weak results after the absence of significant new contract wins for its fabrication unit for the past one year. Nevertheless, the  actual  profit  was  way  more  disappointing;  we  initially  thought  its MYR227m  pipe  order  contract  win  in  late-2013  may  have  helped  to partly  compensate  for  the  poor  results  in  the  fabrication  unit. Furthermore,  pressured  by  higher  interest  rate  and  depreciation expenses  arising  from  the  commissioning  of  its  new  fabrication  yard  at Lot 777 resulted in a marginal loss to the fabrication unit.  

Pushback on Oil and Gas (O&G) hope. KKB’s associate, OceanMight SB,  became  a  licensed  supplier  of  Petronas  under  the  category  of onshore  fabrication  for  offshore  major  construction  in  early  2013.  We were initially encouraged that this associate finally won its first fabrication works  in  September  as  it  was  a  critical  breakthrough  into  the  lucrative O&G  industry.  However,  the  weakening  oil  prices,  which  recently  broke its support level of USD80 a barrel, suggest that a majority of new O&G projects may be put on hold, thus limiting the number of fabrication jobs available in the market. Being the new kid on the block, its unit may also 
find it tougher to compete with its peers on the lack of track record.  

Downgrade to SELL, MYR1.38 TP. Together with the poor contract win  for its fabrication units to-date and waning hope on its associate winning more lucrative O&G contracts in the near future on weakening oil prices, we  are  cutting  our  contract  win  rate  for  the  next  two  years. We  cut  our FY14/15 earnings estimates by a hefty 64.4%/42.0% respectively, while we  introduce  our  FY16  projection.  We  also  trim  our  target  P/E  to  12x FY15F  (from  14x)  as  we  remove  the  premium  we  had  incorporated earlier  due  to  its  exposure  to  the  O&G  industry.  Accordingly,  we  slash our  TP  to  MYR1.38  (from  MYR2.78)  and  downgrade  KKB’s  rating  to SELL (from Trading Buy).

Financial Exhibits

Financial Exhibits

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.

Recommendation Chart

Source: RHB