KNM Group Bhd - 2Q12 results meets expectations

Period    2Q12 / 1H12

Actual vs. Expectations

 The 1HFY12 profit before tax (PBT) of RM37.7m was within our expectations, making up 50% of our FY12 PBT estimate of RM74.9m. However, it came in slightly above the consensus expectation at 58% of its estimate of RM64.5m. 

 We are reviewing KNM’s results on a PBT basis to exclude the impact of the tax credit. FY12 would be the last year KNM is expected to report a positive tax credit. 

Dividends   No dividend was declared.

Key Results Highlights

 On a yoy and qoq basis, 2Q12 PBT was up due to a general improvement in margins (yoy: +>100%; qoq: +36.2%) as the company continues to phase out legacy contracts (won in 2009-10 with subpar margins) that has caused it to bleed for most of 2011.

 Geographically, Europe (mainly attributable to Borsig contributions) continues to be buoyant with a yoy and qoq growth of 28.1% and 61.0% respectively. However, its Americas division (which relate to KNM’s Brazillian and Canadian plants) are still suffering from low capacity utilisation (yoy: -16.3%; qoq:-82.5%). 

Outlook   Management foresees FY12 earnings to be in the black due to legacy projects being completed within CY12.

 Some plant capacity rationalisations may be carried out as certain plants (e.g Brazil/Indonesia/Australia) seem to be suffering from low utilisation.

 The Peterborough project will purportedly receive financing approvals by Oct 2012 with the commencement of EPCC works by early 2013  (refer to Briefing Highlights). 

 The financing approval for KNM’s Octagon Consolidated project is still unresolved.

 Its order book is estimated to be around RM5.1b currently (refer to Briefing Highlights).

Change to Forecasts

 No changes to our forecasts at this juncture. 

Rating   We recognise that KNM has made some YTD improvement but we are not outright positive as we prefer to see a sustained recovery in 2H12. 

 As such, we are only upgrading our rating on the stock to a MARKET PERFORM at this juncture. 

Valuation    Based on an unchanged 9.0x targeted PER on CY13 EPSof 8.1 sen, we are maintaining our fair value of RM0.73.

The discount to the sector’s average PER of 15x is due to the significant earnings risk given KNM’s historical bottom-line volatility. 

 We believe the market has reacted positively ahead (share price gain of +22.8% yesterday) to the turnaround in KNM’s earning, but unless there is more evidence of a sustained recovery and finalisation of financing approvals for some of its major projects (from Petersborough and Orizon Ltd), we believe its share price trading range will continue to be volatile.   

Source: Kenanga