KNM (FV RM0.80 - SELL) FY11 Results Review: In The Red, as Expected

KNM’s FY11 results were within our expectations as we had earlier  anticipated a net loss of about RM70.0m. The loss was mainly attributed to intense competition, especially in the mid to lower end process equipment range, provisions made for foreseeable losses and credit impairment. Although the company has  a  RM5bnstrong orderbook  and a tenderbook  worth over RM17.0bn, we have yet to see these figures translate into positive bottomline contribution. As such, we continue to hold a negative outlook on KNM. Maintain Sell.

Within estimates. KNM’s FY11 results were below consensus but within our expectations, as we had earlier projected the company will  make a net loss of  some RM70.0m. Although its 4QFY11 revenue of RM579.8m was 30.2%  higher  q-o-q  due to higher revenue recognition from its existing and new projects, it only managed to report a small net profit of RM3.0m. This was due to the intense competition  in the mid to lower end process equipment segment as well as provisions made for foreseeable losses.  Further aggravating the already weak FY11 numbers is the presence of  some credit impairment, which led to a net loss of RM83.4m compared with net profit of RM118.2m in FY10.

Business environment continues to be challenging. Despite the recovery in crude oil price to above USD100/barrel,  we believe the business environment for process equipment manufacturers remains challenging due to the intense competition, which may spark off a  price war in which the winners would be the customers.  Also, we think the recovery in the global O&G industry is still slow and has yet to catch up with the pace in mid-2008  when oil price  soared to a record  USD147/barrel. As such, the oversupply of process equipment will continue to  prevent process equipment manufacturers from reaping healthy product margins.

Maintain Sell. Our fair value for KNM remains  unchanged at RM0.80 based on  the existing PER of 13x FY12 EPS. Although the company has a strong orderbook exceeding RM5.0bn and tenderbook  worth more than  RM17.0bn, we have yet to these numbers  translate into positive bottomline contribution. That said, we continue to  hold a  negative view on KNM’s outlook going forward.

Source: OSK188