KUCHING: Sarawakian-based KKB Engineering Bhd (KKB) and Muhibbah Engineering (M) Bhd (Muhibbah) are on track to win several oil and gas (O&G) related projects which would serve as major re-rating catalysts.
The research arm of Maybank Investment Bank Bhd (Maybank Research) expects both offshore and onshore fabrication orders to pick up strongly in the second half of 2014 (2H14) on growing demand for platform structures and Refinery and Petrochemicals Integrated Development-related (RAPID-related) projects.
Several centralised processing platform (CPP) and well-head platform (WHP) jobs are up for grabs in the fourth quarter of 2014 (4Q14), Maybank Research said, adding that several mega infrastructure packages worth estimated US$10 billion are due for awards.
Apart from the existing major fabricators,ie Malaysia Marine and Heavy Engineering Holdings Bhd(MMHE)and SapuraKencana Petroleum Bhd (SapuraKencana)that would leverage on this potential, Maybank IB Research sees two emerging construction-based players, Muhibbah and KKB – the latest to secure the exclusive Petroliam Nasional Bhd (Petronas) fabrication license in 2013 – to also directly benefit.
The research arm noted that Sarawak-based KKB, via its 51 per cent stake in OceanMight Sdn Bhd, operates a 70 acre yard in Kuching while Muhibbah has a 57 acre fabrication yard in Klang.
“Clinching their maiden O&G contracts would be a major milestone for Muhibbah and KKB as they would gain direct exposure to the burgeoning O&G industry, enjoy incremental earnings from O&G, drive orders for their other related businesses including cranes and steel products,and diversify their income sources,” Maybank IB Research explained.
Focusing on KKB, the research arm forecasts the group’s 2014/2015 net profit to grow 26 per cent/48 per cent to RM42 million/RM62 million on record high steel pipe orders, and maiden earnings contribution from offshore O&G fabrication.
It noted that due to the low base of its construction orderbook (estimated RM300 million outstanding at end-2013), the generally bigger sized new O&G fabrication contracts would raise its orderbook quite significantly.
“Group margin should however dilute due to the relatively lower margin O&G fabrication contracts,” the research arm added.
Maybank IB Research estimates that a maiden RM200 million O&G offshore fabrication contract will raise KKB’s total outstanding orderbook by 67 per cent to RM500 million.
It added that KKB’s fabrication yard, with an annual capacity of 30,000 tonnes, would be able to accommodate more than one over 10,000 tonne structure contract.
“We assume another RM200 million fabrication contract win in 2015. This would mean that works on the two fabrication contracts secured this year and next year, would run concurrently in 2015,” the research arm projected.
In addition, it noted that KKB’s yard has a sizeable load-out capacity of 23k tonnes which indicates that the yard can undertake project of more than 20,000 tonnes structure.
Maybank IB Research assumes an eight per cent net margin for the O&G fabrication jobs.
“Although this would be slightly dilutive to the group’s existing net margin of 16 per cent, the significantly bigger orderbook size would still enhance group earnings positively, even after excluding the 49 per cent minority stake for the O&G fabrication jobs undertaken under a joint venture (JV),” the research arm explained.
It forecasts RM200 million revenue contribution in financial year 2015 (FY15) from the total RM400 million fabrication contracts assumed to be secured in 2014/2015.
Based on an eight per cent net margin assumption, it added that the earnings enhancement to KKB would be RM8.2 million (51 per cent stake).
Touching on KKB’s total outstanding orderbook (which includes steel structure fabrication and steel products manufacturing), Maybank Research estimates it to be RM300 million as of end-2013, above its average annual burn rate of RM220 million.
Generally, the research arm opined that KKB’s traditional businesses in steel structure fabrication and steel products manufacturing (steel pipes and gas cylinders) would continue to ride on the growing construction activities in Sarawak driven by the Sarawak Corridor of Renewable Energy (SCORE) and the urbanisation shift within Sarawak.
“With an upcoming state election in 2016, we believe that government spending on infrastructure should accelerate and this will bode well for both KKB’s steel manufacturing and steel structure fabrication units,” it opined.
Maybank IB Research’s 2014/2015 job win assumptions for KKB also include RM100 million per annum of construction and steel structure fabrication works, RM80 million per annum of steel pipe orders, and RM20 million of LPG cylinder orders.
All in, based on its scenario analysis, the research arm’s sum-of-parts (SOP) fair values for Muhibbah/KKB are RM3.90 per share/RM2.75 per share,which imply 17 per cent/15 per cent upside from their current share prices..
“Although share prices have gained, the upside (still) indicates that the market has only partially priced in the full potential from this new O&G business.
“Moreover, our SOP values imply undemanding 11.9-fold/11.4-fold 2015 price earnings ratio (PER) for Muhibbah/KKB,” the research arm affirmed.