KKB Engineering - Makes good with 2H12 order book haul BUY

- We maintain BUY on KKB Engineering, with an unchanged fair value of RM1.80/share – a 10% discount to our sum-ofparts value for the stock of RM2.00/share. The fair value represents an implied forward PE of 8.2x for FY13F – on par with its five-year average forward PE. 

- For FY12, KKB had secured major jobs worth a total of ~RM343mil (+164% vs. FY11’s RM130mil) – making good, and above, our annual new job assumption of RM300mil.

- After a quiet first half, the bulk of the awards were secured in the second half of 2012 – notably, 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.

- According to its latest announcement, KKB has been awarded a RM10.3mil subcontract for the supply, fabrication, and erection for a steel roof structure for the proposed University College of Technology Sarawak and Technology Park at Sungai Merah, Sarawak.

- As stated in our earlier report, management had deemed FY12 as a year of consolidation as job flows had slowed, while major jobs were completed.

- We have further slashed KKB’s FY12F earnings estimate, by nearly half to RM22mil. For the nine months to 30 Sept 2012, it posted a net profit of only RM13.2mil – mainly affected, we believe, by the delay in the fulfilment of its RM70mil earthworks contract with OM Sarawak due to a dispute with a subcontractor.

- The tail-end of existing jobs and new ones secured in the later part of the year would provide some earnings momentum for 4QFY12, moving into FY13F. For now, we are maintaining our earlier FY13F earnings at RM56mil.

- However, for a more conservative stance, we have lowered our FY14F earnings by 12% to RM61.5mil, and introduced FY15F earnings at RM62.2mil, assuming a flat growth pending confirmation of more jobs ahead. We maintain ourannual new job assumption at RM300mil for FY13-FY15.

- Recall KKB has further extended its MoU with Brooke Dockyard & Engineering Works Corp to 28 Feb 2013. We have yet to assume any contribution from this. Oil and gas fabrication jobs could be the catalysts to the share price.

- We maintain our BUY call on KKB for:- 1) other potential engineering and construction jobs remaining within SCORE, 2) strong balance sheet with cash of RM78mil as at end-Sept 2012; and 3) attractive dividend yield of 7%.   

Source: AmeSecurities