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KKB Engineering Bhd
(Nov 17, RM1.73)
Downgrade to “neutral” with reduced target price of RM2.15:
Numbers for the first nine months of financial year 2014 (9MFY14) were below our and consensus expectations as profit after tax and minority interests (Patami) came in at 58% of our and 32% of consensus FY14 forecasts. The improved revenue from its steel pipe manufacturing division was offset by a 51% year-on-year (y-o-y) contraction in sales of its steel fabrication division.

Earnings for the third quarter (3Q) of FY14 declined 82.7% y-o-y attributed to: (i) lower revenue from the completion and finalisation of its major structural steel and cladding works/project in Bintulu, Sarawak and its other ongoing projects which have approached the tail-end of construction; coupled with (ii) higher construction costs. Profit before tax and net profit margin in 3QFY14 were squeezed and declined to 10.6% and 2.7% respectively. Nonetheless, the reduction was offset by higher revenue of RM41.5 million from the manufacturing division, thanks to an increase in the supply of polyurethane-lined mild steel pipes to CMS Infra Trading Sdn Bhd.

We had earlier assumed higher earnings prospects for the group in FY14 and FY15. However, we believe the potential earnings will be sluggish going forward due to a dearth of new jobs and lower net profit margin. Accordingly, we have tweaked our FY14 earnings projections downwards by 24% and by 44% for FY15, with net profit margins of 9.5% and 10.2% respectively.

Despite continuous earnings setbacks, we believe KKB still has a strong proxy to steel-related works in the robust Sarawak region development and will be a beneficiary of future subcontract oil and gas fabrication job awards. This will be supportive of its future earnings, albeit at lower margins. Overall, we downgrade KKB to “neutral” with a lower target price of RM2.15. — MIDF Research, Nov 17

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This article first appeared in The Edge Financial Daily, on November 18, 2014.

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