This article first appeared in digitaledge Weekly, on September 21 - 25, 2015.

THE outlook for the oil and gas sector may be gloomy but KKB Engineering Bhd’s recent fabrication contract wins have helped it buck the trend.

Expectations rose when the Sarawak-based KKB’s 43%-owned Oceanmight Sdn Bhd was granted an offshore fabrication licence by Petroliam Nasional Bhd (Petronas) in March 2013.

Essentially, such a licence is necessary to participate in the oil and gas fabrication jobs dished out by Petronas. Not surprisingly, after securing the licence, KKB’s shares surged 96% to RM2.65 in just five months.

There are seven Petronas-licensed fabricators and KKB (fundamental: 1.95; valuation: 2.40) is one of two in Sarawak. The other is Brooke Dockyard and Engineering Works Corp, which operates a more than 100-year-old yard. 

Considering that Sarawak has quite a number of oilfields to be developed, KKB should prove to be at an advantage compared with the fabricators from the peninsula, who have to grapple with high transport costs. 

Nevertheless, in tandem with the crumbling crude oil prices — now trading just below US$50 per barrel — KKB’s share price plunged 55.46% to RM1.18 in January. It has since gained 30.04% and closed at RM1.54 last Friday, giving the company a market capitalisation of RM397 million.

According to Bloomberg, MIDF Research and AmResearch have a “buy” call on KKB and a target price of RM1.80 and RM2.05 respectively.

A technical note by UOB-Kay Hian says KKB managed to penetrate its breakout level of RM1.51 on Sept 14 and rose 4.8% or seven sen that day to reach an intra-day high of RM1.52. 

The research house adds that the technicals indicate stronger buying momentum ahead and has target prices of RM1.73 and RM1.92 for the stock. 

This was just after the group announced a slew of contracts worth RM171.1 million the week before. 

Alliance DBS Research, on the other hand, says the upside indicates an urgency to establish stock position. Following its close on Sept 14, the stock is expected to test higher ground again with the immediate hurdle being RM1.56.

To recap, KKB’s share price jumped after the announcement of its second offshore fabrication job from Talisman Malaysia Ltd for the engineering, procurement and construction of a wellhead platform for the Kinabalu redevelopment project off the coast of Sabah; the award of a tender from Syarikat SESCO Bhd for the annual supply and delivery of steel products; and a letter of award from Sarawak Energy Bhd for the supply, delivery, erection and commissioning of a 1,000-tonne fuel storage tank for the Lawas power station in Sarawak. 

Collectively, the three deals have a value of RM171.1 million and should contribute to KKB’s earnings over the next few years. 

“For a small and new oil and gas fabrication player to have been able to grab the Kinabalu job is a testament to the group, especially when it’s in an environment where offshore fabrication jobs are hard to come by. KKB is still trying to get other fabrication jobs but competition is tight and margins need to be sacrificed,” says an industry observer.

She notes that KKB’s offshore facility construction, major onshore fabrication licence is valid only for three years and expires in 2016. 

Although there is a slowdown, she adds, there is room for KKB to secure more jobs. “If not in oil and gas, KKB can still participate in other civil construction works as it is still vying for jobs under the Sarawak Corridor of Renewable Energy and road and pipe works in Sarawak, among others,” she says.

AmResearch forecasts KKB achieving a net profit of RM37.4 million on the back of revenue of RM149.7 million for FY2015 and a lower net profit of RM34.2 million on a revenue of RM102.3 million for FY2016.

The revised forecast is based on KKB’s net profit, which fell to RM6.66 million in its second quarter ended June 30, 2015 (2QFY2015) from RM7.59 million during the same quarter the year before. This was also on a lower revenue of RM30.12 million in 2QFY2015 from RM48.47 million previously.

In the first half of 2015 (1HFY2015), KKB’s net profit surged to RM33.33 million from RM11.39 million during the same period last year. This was on the back of a higher revenue of RM106.84 million in 1HFY2015 from RM91.09 million a year ago.

AmResearch maintains KKB’s new oil and gas fabrication order assumption for OceanMight Sdn Bhd at RM150 million each in FY2015 and FY2016. Its analyst Thomas Soon says in a research report on Sept 14, following KKB’s latest contract win, OceanMight’s tender book stands at RM150 million. “We believe other tenders are being pursued to the tune of RM120 million. KKB is aggressive in pursuing jobs in Sabah and Sarawak.”

Apart from oil and gas fabrication, Soon cut KKB’s conventional job assumption for FY2015 to RM80 million from RM250 million previously. “Our new order assumption for FY2016 and FY2017 is now RM200 million each versus RM250 million and RM280 million respectively previously. Post its recent second quarter, it still had an outstanding order book of RM30 million.”

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.