KNM Group - Reversal of provision saves 4Q from a pre-tax loss HOLD

- We maintain our HOLD call on KNM Group with an unchanged fair value of RM0.55/share based on a 25% discount to our adjusted book value estimate of RM0.75/share. Our diluted book valuation excludes the group’s RM772mil goodwill arising from the acquisition of BORSIG Beteiligungsverwaltungsgesellschaft mbH (Borsig).

- KNM’s FY12 net profit of RM130mil (vs. a loss of RM92mil in FY11) came in above expectations, vis-à-vis street’s RM114mil and our forecast of RM78mil. But excluding RM41mil worth of write-backs of provisions for foreseeable losses, the results was 31% below our FY12F pre-tax profit.

- 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 worrisome net order book.

- Furthermore, KNM’s net profit is likely to decline next year due to a normalised effective tax rate (vs. positive tax rates in FY09-FY12) with the final recognition of deferred tax assets arising from the acquisition of Borsig in FY12. We also caution that the group’s final audited results could be different given that FY11 audited net loss of RM92mil were reduced by 7% from the earlier announced results.

- The recent US$100mil (RM309mil) Tatarstan contract is estimated to stabilise KNM’s order backlog at around RM1.8bil – which can only last 9 months of our FY13F revenue. We introduce FY15F net profit with a growth of 13% with an operating margin increase of 1ppt to 12%.

- KNM’s 4QFY12 revenue slid 3% QoQ to RM590mil, which caused pre-tax profit to drop by 63% QoQ to RM9mil – which includes RM13mil reversal of provisions for foreseeable losses in the previous year. This means that the group would have suffered a loss of RM4mil in the absence of any write-back in provisions. Hence, we remained concerned about the group’s operating margins against the backdrop of weak order book replacement prospects.

- Even though the group has successfully acquired the GBP25mil (RM124mil) Peterborough land in the UK with a UOB credit facility, we note that the commencement of project is still uncertain as it 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 this year. But we continue to view the group’s indicative valuation of RM1.8bil-RM1.9bil for Borsig (which is currently operating at full capacity and unlikely to experience much growth), as too high at FY11 PE valuation of 16x-17x, while the rest of the group’s operations are currently suffering losses. The stock 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