KKB’s  share  price  has  halved  from  its  peak  and  dropped  below  our previous  TP  of  MYR1.38,  suggesting  limited  downside  from  here.   We are  ceasing  coverage  on  KKB  as  its  medium-term  outlook  looks gloomy. This is attributable to waning hope of its associate unit winning more oil and gas (O&G)  contracts in the near future  due to  weakening oil prices, and the poor contract wins by its other divisions to date.

The  hope of  O&G contract win  waning.  We were initially encouraged by  the  development  that  KKB  Engineering’s  (KKB)  associate, OceanMight SB,  has become a licenced supplier of Petronas under the category of  onshore  fabrication for  offshore major  construction  in  early 2013.  Furthermore,  this associate won its first fabrication works  in  Sep2014, which  was a critical breakthrough  for the company  in   the lucrative O&G industry. However, the recent plunge in oil prices to around USD50 a  barrel  suggests  that a majority  of  new  O&G  projects m ay  be  put  on hold, thus limiting the number of fabrication jobs available in the market. Being a new kid on the block, OceanMight SB may also find it tougher to compete with its peers due to a lack of track record.

Weak  contract  flows  in  other  divisions.  Separately,  we  noted  an absence  of  new  contract  wins  from  its  general  fabrication  unit  for  the past  one  year.  We  are  also  mindful  of  higher  interest  rates  and depreciation  expenses  arisig  from  the  commissioning  of  its  new fabrication yard at Lot 777, Kuching, Sarawak.  Meanwhile,  KKB’s  major sales are  attributed to two pipe order contract wins in late  2013  and Nov 2014, which totalled MYR271m. These contract wins  may have helped to partly compensate for the poor results in the fabrication unit.

Ceasing coverage.  KKB’s market capitalisation  has halved from its 52-week peak. Its share price has recently slipped below our previous TP of MYR1.38,  suggesting that  the  downside  may  have  been  capped.  Poor contract  wins  by  its  fabrication  unit  to  date  and  waning  hope  of  its associate winning more lucrative O&G  contracts in the near future  amidweakening oil prices  have  prompted us to  cease coverage  on KKB  for now.  That said, we may revisit the company in  the  future as  we believe KKB’s  successful  track  record  in  participating  in  and  completing  many fast-track  projects  may  see  its  dedicated  management  reviving  its business. 

Source: RHB