This article first appeared in The Edge Financial Daily on September 13, 2017

KKB Engineering Bhd 
(Sept 12, 87.5 sen)
Initiate coverage with neutral call and a target price of 95 sen: KKB Engineering Bhd (KKB) started in 1962 as a steel fabrication company in Sarawak. Its core businesses now are engineering and manufacturing. Traditionally, the key profit driver is its manufacturing division, but profits are now erratic due to the lack of long-term contracts. Its  oil and gas (O&G) division’s (onshore fabrication) gestation period is also taking longer than expected due to low oil prices currently and oversupply of fabrication yards. Going forward, KKB is positive that it could still benefit from the gradual return of O&G contracts, especially in Sarawak, and potentially participate in the construction of power plants with its Chinese partner. While waiting for new growth drivers to come into fruition, however, we believe earnings are expected to be patchy in the near term. 

The engineering divison encompasses a wide spectrum of activities which include steel fabrication, civil construction, hot-dip galvanising and O&G. The key revenue driver is civil construction, whereby it is involved in design-and-build for construction projects, engineering, procurement, construction and commissioning scope, architectural steel structures, petrol service stations, factories and plants. The group’s O&G operation is via its 43%-owned associate company, OceanMight Sdn Bhd, which is operating a Petrolium Nasional Bhd (Petronas) licensed fabrication yard for offshore facilities construction and major onshore fabrication. The manufacturing division has two core businesses —liquefied petroleum gas cylinders and steel pipes (including pipe specials and steel tubular piles). KKB’s clients include Shell, Petronas, ExxonMobil, Petron and BHP. The business unit has been a key profit driver until recently due to expiry of a few long-term contracts. 

The group plans to team up with China-based State Nuclear Electric Power Planning Design & Research Institute Co Ltd to bid for projects in Sarawak. We understand that Sarawak Energy Bhd has a long-term plan to raise its power generation capacity to 8,000mw by 2025 from about 5,000mw currently.

As at second quarter of financial year 2017, the group’s net cash is estimated at RM106 million or about 41 sen per share. The healthy balance sheet stands the company in good stead amid the lacklustre conditions currently, giving it the ability to ride out the challenging times and to capitalise on opportunistic acquisitions to expand its footprint. — PublicInvest Research, Sept 12