KKB Engineering - Surpasses our new order assumption for the year 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.

- At the mid-day break, KKB announced that its subsidiary Harum Bidang Sdn Bhd had earlier today accepted a twoyear contract with CMS Infra Trading Sdn Bhd (CMSIT) for the supply of various concrete-lined mild steel pipes and mild steel mechanical couplings for RM74.4mil on a “as-and- when-required” basis.

- This brings the total amount of contracts secured so far this year to RM324mil – surpassing our new order assumption of RM300mil for the full year FY12F. 

- KKB says a written agreement will be entered into between Harum Bidang and CMSIT in due course. The latter is a subsidiary of Cahya Mata Sarawak Bhd, which in turn is KKB’s major shareholder with a 20% stake.

- Given the uncertain nature of the “as-and-when-required” supply contract, we maintain our earnings forecasts for now. Nonetheless, the latest contract puts it in a good position to maintain its earnings momentum in the upcoming quarters, in view of the other major jobs secured YTD.

- KKB last month announced the receipt of a letter of acceptance from the Sarawak state government for a twoyear contract for a proposed water pipeline to the Sama Jaya Free Industrial Zone in Kuching for a sum of RM48mil.

- Prior to that, it had secured a RM171mil structural steel contract with Pertama Ferroalloys Sdn Bhd for the latter’s proposed ferro alloy complex in the Samalaju Industrial Park, Bintulu, Sarawak.

- We reiterate that though KKB’s 1HFY12 results had disappointed, the major jobs secured so far would boost its bottom line from 2HFY12 onwards, and more so for FY13F. Overall EBITDA margin in 1HFY12 was halved to 20% from 40% in 1HFY11. We maintain our EBITDA margin assumption at 27%.

- Its track record in completing its projects on schedule puts it in good stead to secure other various engineering projects within the Sarawak Corridor of Renewable Energy (SCORE) and other 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