- 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 a nearly 80% YoY decline in net profit
to RM1.8mil (-53% QoQ) in 3QFY12, bringing 9MFY12 earnings to RM13.2mil (-67%
YoY) – which represents a mere 30% of our forecast and 41% of consensus.
- However, we are not unduly worried as the slowdown of jobs
had been expected as most of the engineering jobs were at the tail-end, and it
had just secured and started on some major contracts. For now, we maintain our
forecasts.
- The new jobs include the RM171mil steel works contract (announced
in August) with Pertama Ferroalloys Sdn Bhd for the latter’s proposed ferro
alloy complex in the Samalaju Industrial Park, Bintulu, Sarawak.
- KKB has also secured a two-year contract with CMS Infra Trading
Sdn Bhd (CMSIT) for the supply of various concretelined mild steel pipes and
mild steel mechanical couplings for RM74.4mil, and a two-year contract for a
proposed water pipeline to the Sama Jaya Free Industrial Zone in Kuching for RM48mil.
- All in, KKB has secured contracts worth a total of
RM335mil – well surpassing our new order assumption of RM300mil for FY12F. We
believe these contracts would provide KKB with some earnings momentum for
4QFY12, moving into FY13F.
- Its balance sheet remains strong, with cash of RM78.3mil
as at end-September 2012. We believe KKB’s engineering division was partly
affected by a slight delay in the fulfilment of its RM70mil earthworks contract
with OM Sarawak.
- Recall that KKB is the midst of a legal dispute the
subcontractor Global Upline over its termination of contract with the latter,
allegedly in view of work delays in the OM project.
- The 9MFY12 EBITDA margin fell another 4ppts to 16% (halved
versus 9MFY11’s 33%) from 1HFY12’s 20%. We maintain our EBITDA margin
assumption at 27%, given the major engineering jobs that have been secured.
- 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
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