KKB banks on strong track record

by **Cals** Fri 06 Sep 2013, 12:22

KKB banks on strong track record
Business & Markets 2013
Written by Hwang DBS Vickers Research
Friday, 06 September 2013 11:10

KKB ENGINEERING BHD []
(Sept 5, RM2.15)
Rated trading buy at RM2.14 with a fair value of RM2.80: KKB (with a market capitalisation of RM552 million) is one of the most established steel fabrication players in Sarawak and it has been in the business since 1962. Its founder, Datuk Kho Kak Beng, and his family owns 42% while the Sarawak government has a 20% stake via its listed arm, CAHYA MATA SARAWAK BHD [] (CMS). Apart from steel fabrication, KKB also has a strong presence in civil CONSTRUCTION [] and manufacturing of liquefied petroleum gas (LPG) cylinders and steel pipes.

Having recently secured a Petroleum Nasional Bhd (Petronas) fabrication licence, KKB’s 43% owned associate Oceanmight Sdn Bhd is set to undertake its first oil and gas (O&G) fabrication job in the first half of 2014 at the latest. The precious licence allows KKB to directly bid for upstream fabrication works from Petronas and other oil majors in Malaysia.

We believe KKB’s strategic yard in Kuching would offer a significant geographical advantage over its competitors — in the advent of rising discovery of hydrocarbon reserves in Sabah and Sarawak of late — when it comes to job biddings, apart from its established credibility in steel fabrication over the past 50 years.

Thanks to its strength and expertise in engineering and manufacturing, KKB is set to be one of the largest beneficiaries of the Sarawak Corridor of Renewable Energy (Score), which is expected to be the major catalyst for Sarawak’s economic growth.

The participation of established foreign giants such as Hong Kong-based Asia Minerals, Australia-listed OM Holdings and Japanese-listed Tokuyama in Score speaks volumes of its promising prospects.

In fact, about RM28 billion has been committed by pioneer investors in Samalaju Industrial Park, which has witnessed robust activities over the past few years. CMS’ significant role in Score would also bode well for KKB’s civil construction and steel fabrication businesses.

KKB’s order book of about RM390 million (2.3 times its 2012 financial year [FY12] revenue), which was secured over the past one year, will provide strong earnings visibility for the next two to three years. Indeed, its second quarter ended June 30 earnings tripled year-on-year (y-o-y) to RM11.9 million, signifying the inflection point for its strong earnings growth trajectory.

We like KKB for its strong execution track record which registered an average pre-tax margin of 25% over the past five years despite the uncertain economic outlook. Its cash and investment securities (net of borrowings) amounting to 28 sen per share is likely to sustain its impressive 60% dividend payout (three-year average). Assuming 60% dividend payout ratio on estimated FY13 earnings per share (EPS) of 20 sen, it translates into a decent 5.6% dividend yield.

KKB is currently trading at nine times FY14 price-earnings ratio, which remains a cheap bargain in view of Sarawak’s accelerating and sustainable long-term economic growth.

We derive a fair value of RM2.80 for KKB, based on 12 times FY14 EPS, in view of Sarawak’s accelerating long-term growth potential. — Hwang DBS Vickers Research, Sept 5

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This article first appeared in The Edge Financial Daily, on September 06, 2013.