KKB Engineering - Jobs flow making up for slow 1H Buy

- We maintain BUY on KKB Engineering, with an unchanged fair value of RM1.80/share – representing an implied PE of 10.5x for FY12F and a 10% discount to our sum-of-parts value for the stock of RM2.00/share.

- KKB yesterday announced it had on 13 August 2012 received a letter of acceptance from the Sarawak state government for a proposed water pipeline to the Sama Jaya Free Industrial Zone in Kuching for a contract sum  of RM48mil.

- KKB would take 24 months to complete the project by the third quarter of 2014, subject to the terms and conditions to be agreed upon between the state government and the company.

- This latest contract brings the total amount of jobs secured year-to-date to RM250mil – bolstered substantially by the RM171mil structural steel contract with Pertama Ferroalloys Sdn Bhd that was secured  recently for the latter’s proposed ferro alloy complex in the Samalaju Industrial Park, Bintulu, Sarawak.

- Though KKB’s 1HFY12 results had disappointed, the major jobs secured so far would significantly boost its bottom line from 2HFY12 onwards, and more so for FY13F. The Pertama contract is scheduled to be completed by the last quarter of next year.

- The 1HFY12 results were affected by fewer jobs in engineering as the segment’s revenue fell 56% to only RM38mil from RM87mil a year earlier. 

- As noted previously, overall EBITDA margin in 1HFY12 was halved to 20% from 40% in 1HFY11. We maintain our EBITDA margin assumption at 27%, as well as our new order book assumption at RM300mil for FY12F.

- The group’s track record in completing its projects on schedule and delivering on time put it in good stead to secure other various engineering projects in the Sarawak Corridor of Renewable Energy (SCORE) and other infrastructure works for the supply, laying and commissioning of water pipes and other related works in Sarawak and Sabah.

- We maintain our BUY call on KKB for:- 1) other potential engineering and construction jobs remaining within Samalaju, 2) its water pipes supply for the rural water projects; and 3) attractive dividend yield of 7%.   

Source: AmeSecurities