KKB Engineering - RM28m Surprise Order

THE BUZZ

KKB Engineering informed Bursa Malaysia that it has received a Letter of Intent from KACC-JAKS JV (KJJV) for the supply of 1500mm O.D steel pipe piles, subject to the terms and conditions stipulated in the Tender Document. The RM28m award, once formalized by KJJV, is scheduled to commence in 3QCY12 while supply will be completed within 1QCY13.

OUR TAKE

Replenishing after a long drought. KKB Engineering has been silent on new contracts since announcing that it had secured the last two on 12 Sept 2011, involving the manufacture and supply of MSCL water pipes and LPG cylinders for the Bekalan Air Luar Bandar project in Sarawak and Petronas Dagangan respectively. This latest announcement is indeed positive as the company is replenishing its stagnant orderbook.

Positive but not so significant. Although we are delighted to see new contracts beef up KKB’s orderbook, the amount is rather insignificant. We understand that the profit margin for steel pipe manufacturing is thinner than that from steel fabrication works, and as such this contract may only serve to boost KKB’s revenue but would be less significant in its bottom-line contribution. Hence, we prefer not to adjust our earnings estimate for the company at this time as this was part of our earlier forecast.

Revitalisation of SCORE region. OSK Research believes that the activities in the SCORE region may pick up soon and more contracts should be announced and awarded to contractors and sub-contractors in the near term. Having said that, we are adjusting KKB’s valuation from 8.5x P/E to 9.5x P/E to reflect the possibility of a revival in the SCORE region, which may in turn increase KKB Engineering’s chances of bagging more contracts from investors such as OM Materials and Asian Minerals Ltd, for which the company has been pre-qualified for the construction of their plants Samalaju Industrial Park in Bintulu.

Upgrade to NEUTRAL, raising FV. Upon upgrading our valuation parameters, our FV for KKB moves up from RM1.34 to RM1.50, premised on a 9.5x FY12 P/E. We believe the stock is still trading at a slightly cheaper valuation compared with its peer, Eversendai, which is trading at about 10x FY12 P/E. As we believe there may be a pick-up in activities for SCORE in the near term – which may be to the benefit of KKB - we are upgrading our recommendation on the stock to NEUTRAL.

Source: OSK