KKB Engineering - Strong rebound seen for FY13 Buy

- We maintain BUY on KKB Engineering, with an unchanged fair value of RM1.80/share – a 10% discount to our sum-ofparts (SOP) 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.

- KKB’s FY12 result disappointed, with a net profit of RM20.5mil for FY12 – representing only 92% of our estimate and 89% of consensus. It was affected by the completion of major engineering jobs in 1H12, with a low replenishment rate until the later part of the year.

- It proposed a first and final gross dividend of 5 sen/share, representing a 47% payout – which is the highest rate in six years (FY06: 61%, FY07-FY11: 28%-44%), but for a yield of only 3.3%.

- The halving of gross dividend in the absolute amount from FY11’s 10 sen/share was not a surprise given that FY12 turned out to be a year of consolidation and capacity expansion, as reflected in the tripling of capex – which we believe partly relates to the expansion of its fabrication yard.

- Additionally, more than a third, or a total of RM16.7mil, of its strong operating cash flow of RM45.4mil (vs. a net outflow of RM9.6mil in FY11) was used to pare down borrowings, which now totals RM10.7mil – for a gross gearing of only 4%.

- While it would be fiscally beneficial to gear up further, we are equally comforted by its strong cash position of RM69mil vs. RM75mil a year earlier. Its net cash stash represents about 13% of our SOP value for the company.

- We continue to expect KKB to rebound in FY13, with a near tripling of earnings to RM56.6mil on the back of its current order book of RM376mil – 2.3x of FY12’s revenue. We expect margins to improve significantly on the back of its securing a few major engineering jobs, including the RM171mil structural steel job for a ferro alloy complex in Samalaju.

- The bulk of its current jobs is outstanding given that most of them were secured only in the later part of 2HFY12. We believe the outstanding amount could be one of the highest at any one time in the company’s history – if not the highest ever. We maintain our annual new job assumption at RM300mil for FY13-FY15.

- Hence, given the strong order book and operating cashflow, minimal interest commitment and the frontloading of capex, we maintain our annual gross dividend projection at 10 sen/share for FY13F-FY15F – for a yield of 6.6%.

Source: AmeSecurities