KKB Engineering Bhd
(Aug 7, RM1.61) 
Maintain buy with an unchanged fair value of RM2.05: We maintain a “buy” on KKB Engineering Bhd, with an unchanged fair value of RM2.05/share — a 5% discount to our sum of parts (SOP) of RM2.15/share.

KKB posted a second quarter of financial year 2015 (2QFY15) net profit of RM6.7 million (down 12% year-on-year [y-o-y], down 75% quarter-on-quarter [q-o-q]), bringing first half (1HFY15) bottom line to RM33.3 million ( up 193% y-o-y) — nearly matching our forecast of RM35 million and consensus estimate of RM32.6 million for the full year. 

As expected, no interim dividend was declared for the quarter and 1H.

While the results were positive, we maintain our forecasts for now, given that the next two quarters are expected to be flat in view of depleting conventional jobs in hand, and the timing of contracts.

We nonetheless remain confident of KKB’s ability to secure rural development jobs, particularly in the supply of steel pipes, in the lead-up to the impending state elections.

We also remain optimistic about its 43%-owned associate Oceanmight Sdn Bhd’s prospects in securing oil and gas (O&G) fabrication jobs, notwithstanding the current bleak outlook in the O&G sector.

Post-2Q results, we estimate that KKB still has an outstanding order book of about RM30 million. For now, we maintain our FY15 order assumptions at RM250 million for its conventional activities and at RM150 million for its O&G outfit.

While its order replenishment is likely to fall short for the conventional steel engineering segment, it may yet still surprise on the upside for the O&G segment. Our numbers may be adjusted upwards if it is successful in securing jobs, including O&G contracts, within the third quarter of 2015 (3Q15).

We understand that Oceanmight is still in the running for over RM300 million worth of O&G fabrication jobs and about RM85 million worth of conventional jobs. We stay convinced that Oceanmight, being a Sarawakian outfit, stands a very strong chance in securing fabrication jobs.

This is more so after it successfully completed its maiden O&G fabrication job in April 2015 for the construction of a RM25 million well-head platform (with zero loss-time injury) — reflecting its ready-to-deploy engineering expertise and capabilities, as well as a geographical cost-competitive advantage.

Mitigating any downside risks is a solid balance sheet, with a net cash position of RM121 million as at end-June 2015 (up 11% q-o-q and versus only RM9 million a year earlier). — AmResearch, Aug 7.

This article first appeared in digitaledge Daily, on August 10, 2015.