KKB Engineering - Still Awaiting Better Days

KKB Engineering (KKB)’s 9MFY12 results were disappointing, with its net profit amere RM13.2m, which is less that 50% of our full-year forecast. This was mainlydue to the mismatch of timing between completion of existing projects andreplenishment of new ones. Although KKB has announced five major contracts inthe past few months, we believe they may only start delivering earnings in4QFY12, spilling over to FY13f. We are expecting a brighter future from nextquarter onwards, riding on Sarawak’s potential growth. Thus, we maintain ourBUY call and our FV at RM1.75.

Another disappointing quarter. KKB disappointed us and the street by recording a 3QFY12 net profit of only RM1.8m (-52.7% q-o-q and -79.4% y-o-y). The weak result was mainly due to lower income from its civil construction division as the current projects are nearing completion while newly-secured projects have just commenced in 3Q this year. Similarly, the hop dip galvanising division also recorded a decrease in revenue due to lower replenishment of new orders. Moreover, lower LPG cylinders off-take by key customers has led to lower sales in that division. Although its steel fabrication division and steel pipes business improved, it could not lift the overall group performance.

4Q may be brighter. Despite weak 3Q earnings, we believe there may be some recovery in 4Q as the group may start to recognise earnings from the contracts it has secured a few months ago. As stated in our earlier report, we have warned investors that most of the earnings from the contracts may spill over to FY13 and thus the earnings to be contributed to its FY12’s bottomline are quite limited. Therefore, we are prompted to further downgrade our FY12 earnings forecast for KKB to RM23.9m, which is 30% less than the original forecast.

KKB may rise with Sarawak. After our recent visit to the Bintulu-Samalaju Industrial Park, we are of the view that Sarawak is growing at a strong pace and we may see vibrant developments in the near future. With its strong presence in Sarawak, we believe KKB may be able to ride on this wave and benefited from the state’s growth. Thus, we are retaining our FY13f earnings forecast for now. Furthermore, the group’s JV discussion with Brooke Dockyard is still ongoing and may be a positive catalyst in future.

BUY on weakness. Although FY12 has been a disappointing year for KKB, we are hopeful that FY13 may turn better, with the anticipated strong developments in Sarawak boosting earnings. Thus, we maintain our BUY call and RM1.75 FV, which was derived from 10x FY13 PE. At its current price, KKB provides investors a potential upside of 19%. As such, we see some opportunity to buy the stock on weakness.

Source: OSK