KKB Engineering Bhd (July 27, RM1.65)

Maintain buy with a higher fair value (FV) of RM2.10: We have reviewed our numbers and cut our financial year ending Dec 31, 2016 (FY16) forecast net profit of KKB Engineering Bhd by 25% to account for the lack of conventional jobs in the past six months, but raised forecast net profits of FY17 and FY18 by 3% and 55% respectively.

This follows KKB’s joint venture (JV) with WCT Holdings Bhd securing a RM1.29 billion, 51-month road main works contract for the Pan Borneo Highway in Sarawak. KKB’s 70% share of the contract amounts to approximately RM900 million. The JV received the letter of award for Package WPC-09 from the project delivery partner, Lebuhraya Borneo Utara Sdn Bhd, on Monday for the stretch from Sungai Arip Bridge to the Bintulu Airport junction. The estimated distance is about 66km.

KKB has surpassed our earlier RM200 million new-order assumption for FY16. We now assume further new orders of RM100 million for FY16 (approximately RM30 million for various pipe supply jobs already secured), RM600 million (versus RM200 million previously) for FY17 and RM200 million for FY18. We are assuming earnings before interest, taxes, depreciation and amortisation margin of 6% for KKB’s 70% share of the RM1.29 billion Pan Borneo Highway contract. Our group earnings before interest and tax (Ebit) margin projections now stand at more conservative levels of 15% for FY16 and at 10% to 11% for FY17 to FY18 versus 20% to 30% previously. It posted an Ebit margin of 29% in FY15. Year to date (YTD), KKB has secured RM1 billion worth of contracts, including two ongoing platform fabrication jobs for Talisman that are scheduled to be completed by the third quarter ending Sept 30, 2017 (3QFY17).

We expect KKB’s associate Oceanmight to secure a forecast annual oil and gas order replenishment of RM130 million for each of FY17 and FY18. Looking ahead, KKB remains poised to supply guard rails, lamp posts, and water steel pipes for the Pan Borneo Highway. The group posted a 1QFY16 core net loss of RM2 million — halved that of the previous quarter, due to the lack of conventional activities and new jobs. We expect activities to pick up pace from 3QFY16 onwards.

Mitigating any downside risks is the group’s net cash position of RM139 million as at end-March 2016. We maintain our “buy” call on KKB, with a higher sum-of-parts (SoP) FV of RM2.10 per share (versus RM2 per share previously @ 5% discount to SoP), at an implied price-earnings ratio of 13 times for forecast FY17. — AmInvestment Bank Research, July 27

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This article first appeared in The Edge Financial Daily, on July 28, 2016. Subscribe to The Edge Financial Daily here.

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