KKB (FV RM1.34- SELL) 1QFY12 Results Review: No Spark at the Start of 2012

We are disappointed with KKB Engineering’s (KKB) 1QFY12 net profit of RM7.7m (-60.8% y-o-y, +15.1% q-o-q) which was 49.5% below our expectations. The lacklustre performance was primarily due to weaker revenue from the engineering division  which saw  slower contract replenishment and heightened raw material costs. We think 2012 would be a challenging year in view of global economic and local political uncertainties and hence, we are tweaking down our earnings forecast and FV to RM1.34. We downgrade KKB to SELL.

Weaker start  to FY12.  KKB’s 1QFY12 net profit of RM7.7m was  way below our and consensus estimates, shrinking by 60.8% y-o-y from RM19.7m in 1QFY11. Although the result was some 15.1% better on a q-o-q basis but it remains uninspiring considering that 4QFY11 included higher general and administrative cost  arising from year-end bonus payment. The tepid  performance for  1Q  was mainly attributed to: (i)  the  slowdown  in contract replenishment for both  construction and  steel  fabrication  divisions with the absence of strong projects flow, and (ii) the heightened raw material prices which lead to the increase in cost of sales and hence, further eroding KKB’s earnings for the quarter. That aside, KKB’s manufacturing division managed to cushion the engineering division’s poor performance with moderate order flows for water pipe, following an increase in pipelaying projects in East Malaysia.

Short-term challenges remain.  The  upcoming general election, whose date is not known yet, has increased the level of political uncertainty in Malaysia and the sentiment is further dampened by  challenging global economy conditions. There have been  very limited news flows  on  the development of  the  Sarawak Corridor of Renewable Energy (SCORE) which is KKB’s main market. Furthermore, plans to  revitalize some of the key SCORE projects have not  been implemented as fast as we have anticipated. Also, the latest political developments in Europe have further  dampened the global economic recovery as well as investor sentiment  on cyclical stocks like KKB. While we expect to see more positive developments from  KKB’s  collaboration with Brooke Dockyard and anticipate its existing businesses to  also  undergo a  gradual recovery in 2HFY12, the weak 1Q  alone  prompted us to slash KKB’s FY12 and FY13 earnings estimates by 33.3% and 30.5% respectively. KKB’s continued weak financial performance may prompt a sell down of its shares in the short term. Taking this and our new FV of RM1.34 (which is derived from an unchanged parameter of 8.5x FY12 EPS) into consideration, we have decided to downgrade KKB to SELL. Nevertheless, KKB  is  still a solid company in our opinion and we shall revisit its valuation should any potential rerating catalysts emerge in the future.

Source: OSK188