This article first appeared in The Edge Financial Daily, on November 9, 2015.

KKB Engineering Bhd
(Nov 6, RM1.66)
Maintain buy with a lower target price (TP) of RM2: The company posted a net loss of RM3.4 million for the third quarter ended Sept 30 of financial year 2015 (3QFY15), bringing 9MFY15 earnings to RM30 million (+138% year-on-year) — amid depleting conventional order book and after completion of the maiden well-head project in 2Q15. 

No interim dividend was declared for the nine-month period, as was the case in the previous corresponding period. 

Despite the quarterly loss, 9MFY15 earnings accounted for 80% to 81% of our earlier, and consensus, full-year estimates. 

As the company expects a weaker 4Q, we have cut our FY15F earnings forecast by 23% to RM28.8 million. The pickup will only be in FY16. 

We raise our FY16F and FY17F by 10% and 9%, respectively, given that the bulk of the Talisman well-head contract its associate Oceanmight secured in September will likely be booked by then. 

The group’s order book currently stands at RM180 million, including the Talisman well-head job that is scheduled for completion by 2Q17. 

Recall that KKB in September announced three contracts, including the Talisman job, worth a total of RM171 million. 

Oceanmight’s fabrication jobs directly benefit KKB, given its engineering expertise in steel and pipe manufacturing. 

The group’s current tender book stands at RM337 million, comprising RM87 million and RM250 million of conventional and oil and gas (O&G) jobs, respectively. 

We maintain our conventional job assumption for FY15F at RM80 million. 

KKB expects the outlook to be challenging and continues its prudent cost management. It is staying focused on its long-term strategies to identify viable new business opportunities. 

KKB said the group has started its design and engineering phase of the engineering, procurement and construction of the Talisman well-head platform. 

KKB will soon start work on the supply of fabricated steel structures under Petroliam Nasional Bhd’s liquefied natural gas Train 9 project. 

Downside risks include the lack of conventional jobs for its engineering and manufacturing divisions.

Mitigating the downside risks is a solid balance sheet, with a net cash position of RM123 million as at end-September (+2% quarter-on-quarter and +66% year-on-year). — AmResearch, Nov 6