Friday 6 July 2012

KKB Engineering - 2012 - a year of consolidation and capacity expansion BUY


- We maintain BUY on KKB Engineering Bhd, with a fair value of RM1.80/share – representing a 10% discount to our sum-ofparts value for the stock of RM2.00/share.

- KKB announced yesterday that its subsidiary KKB Builders Sdn Bhd had been served with a writ of summons (dated 26 June 2012) by Tan Sri Ting Pek Khiing’s privately-owned  vehicle Global Upline Sdn Bhd seeking RM31.6mil for alleged wrongful termination of a subcontract.

- In an announcement to Bursa Malaysia yesterday evening, KKB said it is of the opinion that the claim “is frivolous and vexatious and without merit.” Accordingly, it “will strongly oppose the claim … and will counter-claim and seek all relief arising there(of).”

- Our channel checks reveal that this civil suit stems from a subcontract that KKB had awarded to Global Upline in relation to the main RM70mil earthworks contract with OM Sarawak, at the latter’s 500-acre manganese and ferro silicon alloy smelter site in Samalaju. 

- Global Upline is claiming that KKB Builders’ notice of termination of the sub-contract was illegal, null and void. The earthworks works were earlier scheduled to be completed by the end of last month. We understand that the job was already 85% completed prior to KKB asking for an extension of time (EOT). 

- Management believes the impact stemming from the late delivery would be minimal, if at all, given the near completion of the job, and mitigated by the EOT. Following the termination, KKB has assumed full control of the job site, and works could be completed by the end of this month.

- We understand that management views 2012 as a year  of consolidation and capacity rebuilding at its Muara  Tebas fabrication facility, for which it is poised to bid aggressively for new opportunities in the oil and gas industry support services from end-2012 onwards.

- As at end-March 2012, KKB had tendered for RM320mil worth of jobs comprising 60% in engineering and the remaining in manufacturing. The results of the bids are expected to be known by the end of 3Q2012.

- KKB’s manufacturing division is benefitting from an increase in demand stemming from the supply of pipes for rural  water supply projects in both Sabah and Sarawak.

- We reiterate our BUY for now premised on:- 1) potential engineering and construction jobs remaining within Samalaju in which foreign investors are investing heavily in multi-billion ringgit factories in the next 2-3 years; 2) its water pipes supply for the rural water projects; 3) and decent dividend yield of 6%.  

Source: AmeSecurities

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