November 3, 2011

KKB Engineering - Growing with Score

Stock Name: KKB
Company Name: KKB ENGINEERING BHD
Research House: OSKPrice Call: BUYTarget Price: 2.20



KKB Engineering Bhd
(Nov 3, RM1.72)
Maintain buy with revised fair value of RM2.20 from RM2.83: The presence of KKB plus Samalaju Industrial Park's attraction to investors given its good basic infrastructure, available water supply and huge capacity to supply electricity at competitive pricing, we expect some sizeable contracts to come KKB's way in FY12 and FY13.

While we like the company's solid balance sheet and potential to reap enormous earnings from the Sarawak Corridor of Renewable Energy (Score), we maintain our 'buy' recommendation but revise lower our fair value to RM2.20 on incorporating lower earnings arising from the temporary slowdown of contracts flow this year, and on applying a more conservative 8 times price earnings ratio (PER).

Having clinched its first job in Samalaju via a water supply project in Bintulu worth RM196 million as well as the contract to carry out earthworks for OM Materials, KKB is positioned to make its presence felt in Samalaju Industrial Park. As the company has been pre-qualified to construct plants for Tokuyama, Asia Mineral Ltd, OM Materials and Press Metal's investments in Samalaju, we expect it to secure more sizeable contracts here in the near term.

Phase 1 of the company's expansion plan involves doubling the fabrication capacity of its new deepriver front yard to 30,000 tonnes per annum. This has just been completed while construction of a jetty to facilitate access to Sungai Sarawak is still in progress. Phases 2 and 3 are scheduled to be completed by 2014. By then, KKB's earnings would rise to another level, boosted by the additional fabrication capacity and logistics advantage from the deepwater front and jetty

The developments in Score slowed down in 1H to make way for the state elections. Nevertheless, we are seeing a pick-up in contracts flow of late and KKB recently secured some contracts, although these are small. We believe that Score projects will be revived in FY12 given that the construction of most plants in Samalaju will kickstart next year.

We remain positive on KKB's progress although its share price is down 21% from its 2011 peak in tandem with the market-wide correction. As we like the company's strong balance sheet and good track record, we maintain our 'buy' recommendation. However, we prefer to lower our estimates for the next two years and slash our PER parameter to 8 times from 10 times, for a new fair value of RM2.20. ' OSK Research, Nov 3


This article appeared in The Edge Financial Daily, November 4, 2011.

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