KNM (FV RM0.80 - NEUTRAL) 1QFY12 Results Review: Better But Consistency Is The Question

KNM’s 1QFY12 results were above expectations, mainly  due to  higher revenue recognition from its existing and new projects as well as a positive tax income of RM19.4m, which contributed 55%  of  its net profit.  We  still find  the operating environment challenging, especially with the  debt  crisis in Europe  weighing on commodity prices, especially crude oil, which may lead to new project delays. We are keeping our FY12 forecasts unchanged for now until we some consistency in the company’s quarterly earnings. However, we are upgrading our call to Neutral from Sell since  its share price has pulled back significantly in tandem with  the global market selldown.

Above estimates. KNM’s 1QFY12 results beat consensus and our expectations, making up 46% and 57% of both FY12 forecasts. The better-than-expected 1QFY12 was mainly boosted by the higher revenue recognition from the company’s existing and new projects. Also, its North America operations improved significantly on the back of positive earnings contribution from the Canadian oil sand projects.  As a result,  its 1QFY12 revenue of RM585.8m surged 41.8% YTD. The 1QFY12 net profit of RM35.1m was also significantly higher q-o-q, largely contributed by a tax income of RM19.4m. This tax income arises from the utilization of tax incentives from its acquisition of Borsig. 

Operating environment remains challenging. We believe the debt crisis in Europe may potentially creating greater spillover effects, which  would affect all commodities prices, especially oil price, and this would not be good for KNM since there  may be  potential delays in new O&G projects from its customers. KNM also faces fierce competition from China and Korea players which are also encountering excess capacity, and hence would not hesitate to  depress prices at the expense of margins to cover their overhead costs. That said, any economic crisis would not be good for KNM’s business.

Upgrade to Neutral from Sell. Given that KNM's share price has retraced significantly in tandem with  the selldown in the global markets, we are upgrading our call from Sell to Neutral. We remain Neutral because we are still unsure  if KNM  can  consistently deliver quarterly profits, especially when the economic environment is not in its favour. Also, we are keeping our FY12 earnings unchanged for now, until we see more certainty in terms of consistently positive performance  in the next quarter. With that, our fair value for the company remains unchanged at RM0.80, based on the existing PER of 13x FY12 EPS.

Source: OSK