KKB Engineering - Nails RM171mil ferroy alloy complex steel structure job BUY

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

- KKB announced yesterday it has clinched a RM171mil structural steel and cladding works 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 15-month contract will commence in the current quarter and be completed in the last quarter of next year. KKB said Pertama had accepted its bid pursuant to an international tender earlier this year for the proposed complex.

- This brings the amount of major contracts that the company has announced year-to-date to RM199mil. This civil engineering job should be able to bolster KKB’s margins, which have so far depended on a RM70mill earthworks contract and the supply of pipes for the rural water supply projects.

- It announced in the middle of last month that it had been issued a letter of intent by KACC–JAKS JV for the supply of steel pipe piles for a total of RM28mil. The supply of the pipe piles is scheduled to commence within 3Q12 and completed within 1Q13.

- We are maintaining our annual new order book assumption at RM300mil. KKB’s earnings this year would be supported by the latest contract and the RM70mil earthworks at OM Sarawak’s 500-acre manganese and ferro silicon alloy smelter site at Samalaju.

- As stated previously, 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. 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 7%.

Source: AmeSecurities