- We maintain BUY on KKB Engineering, with an unchanged fair
value of RM1.80/share, following the release of its 2QFY12 results which came
in below expectations.
- KKB’s 1HFY12 net profit of RM11.4mil (-64% YoY) accounted
for only 26% of our full-year forecast of RM44mil and 27% of consensus. As
expected, no interim dividend was declared.
- Nonetheless, we do expect the company to possibly make up
for much of the shortfall in 2HFY12. This follows its recent securing of a
RM171mil structural steel contract with Pertama Ferroalloys Sdn Bhd (formerly
AML Manganese (Malaysia) Sdn Bhd) for the latter’s proposed ferro alloy complex
in the Samalaju Industrial Park, Bintulu, Sarawak.
- 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.
- The high margin RM70mil earthworks contract at OM Sarawak’s
500-acre manganese and ferro silicon alloy smelter site in Samalaju had come to
its tail-end during 2QFY12. As such, engineering EBITDA margin fell substantially
to 14% from 46% a year earlier.
- On the other hand, its pipe manufacturing division performed
much better and lessened the impact of the engineering segment, with revenue
rising 181% to RM57mil from RM20mil in 1HFY11, while EBITDA margin doubled to 21%
from 10% previously.
- Overall EBITDA margin 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.
- So far, KKB has secured major projects worth a total of RM200mil,
bolstered by the latest Pertaman Ferroalloys contract, which should in turn
boost its operating margins as well. The job is expected to start in the
current quarter.
- The group is pursuing various engineering projects, particularly
those related to the Sarawak Corridor of
Renewable Energy and other infrastructure works for the supply, laying and
commissioning of water pipes and other related works in Sarawak and Sabah.
- For now, 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) decent dividend yield of 6%.
Source: AmeSecurities
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