KNM Group - Strong 9MFY12 results but order book depleting Hold

- We maintain our HOLD call on KNM Group with an unchanged fair value of RM0.55/share based on a 20% discount to our adjusted book value estimate of RM0.71/share. Notwithstanding the strong set of results, we maintain our price/book valuation vs. earnings-based methodologies given KNM’s past erratic earnings record over the past three years. 

- KNM’s 9MFY12 net profit of RM113mil (vs. a loss of RM86mil in 9MFY11) came in well above expectations, accounting for 1.5x of our FY12F net profit of RM78mil and 1.4x of street estimate’s RM83mil. Excluding RM28mil worth of writebacks of provisions for foreseeable losses, the results accounted for 1.1x of our FY12F net profit. 

- But we maintain our FY12F-FY14F net profits for now given the uncertainty about the group’s current earnings trend against the backdrop of the disconnect between KNM’s revenue and declining net order book (excluding the Peterborough and Sri Lankan waste-to-energy projects) (see Chart 3). 

- KNM’s 3QFY12 revenue grew 4% QoQ to RM587mil, driving pre-tax profit up by 5% QoQ to RM23mil – which has an absence of any significant write-back of provisions. Excluding the Peterborough and Sri Lankan waste-toenergy projects, we understand that KNM’s current order book has contracted by 22% QoQ to a worrisome RM1.8bil – 82% of FY13F revenue. While the group’s tender book has risen from RM16bil to RM19bil, we remain cautious about the success rate given the tightening credit markets in Europe. 

- We still view the group’s earnings prospects as challenging given the current global environment and the long-term development of the RAPID project. Even though the group has successfully acquired the GBP25mil (RM124mil) Peterborough land with a UOB credit facility, the project still requires a massive GBP233mil (RM1.2bil) for the first phase involving a 35MW waste-to-energy plant and a larger GBP251mil (RM1.2bil) for Phase 2’s additional 55MW.

- The group still plans to list its 100%-owned Borsig in Singapore to raise further cash proceeds early next year. But we continue to view the group’s indicative valuation of RM1.8bil-RM1.9bil for Borsig may be too high given its FY11 PE valuation of 16x-17x, while the rest of the group’s operations are currently suffering losses. As management indicated that Borsig is already operating at almost full plant utilisation, we do not expect its forward earnings growth to be significant given the current global economic environment. 

- Given KNM’s weak balance sheet and losses for its other segments, a more conservative PE valuation of 10x could translate into a potential write-down of Borsig’s book value by RM600mil – 37% of KNM’s shareholders funds currently. KNM currently trades at an adjusted PBV of 0.7x, which is at the lower range of its 0.7x-1.1x over the past three years.  

Source: AmeSecurities