KKB Engineering - A beneficiary of Budget 2013 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.

- Under Budget 2013, the government has proposed a RM4.5bil allocation for the implementation of projects to bridge the gap of urban and rural development in 2013. It includes a RM1.6bil sum for rural utility infrastructure projects for water supply to 24,000 houses and electricity supply to 19,000 houses and RM100mil to supply 40,000 water tanks for rainwater harvesting, particularly in the interiors of Sabah and Sarawak.

- Though there are no specific breakdowns of the allocation to Sabah and Sarawak, KKB, along with Hock Seng Lee Bhd (BUY, FV: RM2.59/share), are expected to be prime beneficiaries. Both companies have already secured various water supply jobs at the Samalaju Industrial Park within SCORE as well as for various rural projects.

- Additionally, the allocation also includes RM100mil for the supply 40,000 water tanks for rainwater harvesting, particularly in the interiors of Sabah and Sarawak.Though Weida (M) Bhd (Non-rated) would be the primebeneficiary of this, we do not rule out KKB securing a portion of such jobs given its expertise in steel fabrication in both states.

- On another note, the government has proposed to allocate RM386mil to ensure the prices of essential goods in Sabah, Sarawak and Labuan are sold at lower prices through the opening of 57 KR1M and to bear the cost of delivering products from Peninsular Malaysia. Specifically, it was noted that with the price uniformity programme, a 14kg cooking gas cylinder in Ba’kalalan, Sarawak, can be purchased at only RM26.60, vs. RM70 currently.

- Notably, KKB had on 25 Sept 2012 accepted a one-year extension (from Sept 2012 to Sept 2013) of contract with Petronas Dagangan Bhd for the fabrication, supply and delivery of 14kg and 50kg LPG cylinders. The contract is valued at RM11mil. 

- This brought the total amount of contracts secured so far this year to RM335mil – well surpassing our neworder assumption of RM300mil for the full year FY12F. 

- We maintain our BUY call on KKB for:- 1) additional boost from Budget 2013 for Sabah and Sarawak’s infrastructure development (apart from the rapidlygrowing SCORE), including rural water supply jobs; and 2) attractive dividend yield of 7%. 

Source: AmeSecurities