CALL IT a pre-election rally or a Sarawak play, but the share prices of some companies in the state have been on a steady uptrend.

Cahya Mata Sarawak Bhd’s (CMS) share price is hovering at a record high currently. The stock had risen from a low of RM3.35 in mid-December last year to RM4.96 last Thursday.

CMS’ associate company, KKB Engineering Bhd (fundamental: 2.5; valuation: 1.4), has also seen keen interest of late. Its share price has gained 23% in the past fortnight, giving it a market capitalisation of RM435.7 million.

From RM1.37 on April 2, the stock rose to RM1.69 on April 15. Trading volume has picked up as well with 1.3 million shares traded on April 15 compared with 88,900 shares on April 1.

Analysts say apart from the election theme, the rise in KKB’s share price could be due to the expectation that the company would be a beneficiary of CMS’ recently awarded RM308 million contract to build a world-class museum and heritage trail in Kuching. CMS (fundamental: 3; valuation: 1.1) is a major shareholder in KKB with a 20.1% stake.

Only Sarawak’s polls are held at a different time from the general election. The 10th Sarawak election was in April 2011.

“The CMS contract could signal the start of more projects to come, ahead of the impending state election. As we noted earlier, there is a possibility that CMS will subcontract some jobs to KKB, insofar as they relate to steel fabrication and supply of pipes,” says AmResearch analyst Thomas Soon, who tracks Sarawak-based companies.

On the museum contract, Maybank Investment Bank Research, in an April 15 report, states that it represents CMS’ first major construction job win since 2009, lifting its order book by a significant 51% to an estimated RM908 million.

The research house points out that this could be a prelude to more construction job wins for CMS in the near term, especially works related to the Pan-Borneo Highway and Sarawak Corridor of Renewable Energy (SCORE).

“Meanwhile, its cement and construction material businesses are key beneficiaries of the growing construction activities, driven by the upcoming state election, the Pan-Borneo Highway and the 11th Malaysia Plan,” it adds.

While the awarding of infrastructure jobs in Sarawak is picking up, analysts say the macro operating landscape continues to be tough for companies there, and KKB is no exception.

“KKB has seen a slowdown in its conventional steel fabrication/engineering business, and the operating landscape remains challenging. Its prospects will largely hinge on its oil and gas venture, through its associate OceanMight Sdn Bhd, which has the expertise and capacity,” says Soon.

“Despite a tougher operating environment for oil and gas companies, we still expect them (KKB’s associate) to get projects from Petronas. They are now finishing their RM20 million maiden project.”

It has not been plain sailing for KKB all these years. Its 43%-owned associate OceanMight became a Petronas-licensed fabricator in 2013. Being the only fabricator in Sarawak, it was expected to stand a better chance of landing jobs than players from the peninsula, but so far it has yet to generate any major contribution.

The sharp fall in crude oil prices, which is causing a slowdown in the oil and gas sector, has not helped matters either.

KKB started diversifying, which includes its venture into the oil and gas sector, as it has a long-term plan to move up the value chain in structural steel fabrication. Apart from its core steel fabrication business, it is into civil construction as well as the manufacture of steel pipes and liquefied petroleum gas cylinders.  

Over the years, KKB’s margins have been declining, from 44.11% in 2010 to 28.57% last year. Its earnings have been on a downward trend as well. For the financial year ended

Dec 31, 2014, KKB saw its net profit drop almost 32% year on year to RM23.9 million.

Likewise, its gross dividend per share decreased from 17.5 sen in FY2010 to only four sen in FY2014.

Even so, the group saw its cash triple to RM98.6 million as at Dec 31, 2014, from RM37.5 million a year earlier.

AmResearch’s Soon observes that there has been a decline in large investments in Samalaju Industrial Park, a SCORE hub that front-loaded investments for the major engineering projects.

“What are left now are piping jobs that have lower margins compared with engineering. However, there are other growth nodes within SCORE that can still bring in jobs,” he says.

“What we need to see that will help companies like KKB is a step-up in rural infrastructure work in Sarawak. The Pan-Borneo Highway will help as it will be spread out evenly among companies, including privately owned entities. We do not expect just one major player to get a chunk of it.”

In a Feb 18 report, AmResearch notes that KKB’s unbilled sales stand at RM105 million, which would last nine months. It adds that KKB has bid for RM47 million worth of conventional (steel structure/engineering) jobs, over and above its earlier bids of RM130 million.

“We are assuming new orders of RM250 million, RM280 million and RM300 million over the next three years,” says the research house, which has a “buy” call on the stock, with a fair value of RM2.05.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on April 20 - 26, 2015.

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