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Friday, May 27, 2016

KNM - Building a renewable energy (RE) base

KNM - Building a renewable energy (RE) base

Author: kltrader   |   Publish date: Fri, 27 May 2016, 12:04 PM 

1Q16 came in below

1Q16 core earnings came in below, with the shortfall mainly from the losses at its Canadian operations (4% of order backlog). Excluding that, results would have met our expectation. For that, we cut 2016-17 earnings by 21%-32%. Earnings downgrade aside, the angle to KNM is its transformation into a RE play. Executing it is a major catalyst. Maintain BUY with an unchanged MYR0.80 TP, based on 0.4x EV/backlog, which implies 8x 2017 PER.

Losses at Canada ops was the key drag to 1Q16

1Q 16 core net profit of MYR12m (-29% QoQ; -80% YoY) accounted for 11% of our initial FY forecasts. The weakness was mainly due to gross losses suffered at its Americas operations (i.e. Canada; -MYR6m in 1Q16 vs. +MYR3m in 1Q15), which dragged down its gross margin by 3.5-ppt YoY. Otherwise, its Europe and Asia & Oceania operations reported stronger YoY gross profit (+32% & 6%), fuelled by its Borsig and RAPID operations.

Cut forecasts; business in transition

We have lowered 2016/17 core earnings by 32%/21% to MYR72m/ MYR111m respectively, accounting for the setback at its Americas ops. Our 2018 earnings forecasts are unchanged. That aside, we expect stronger quarters ahead, profit-wise, on seasonal strength and receding exposure at its Canada ops. On the local front, we expect KNM to continue benefitting from the upcoming RAPID petrochemical EPCC tender packages, which are expected to be awarded in 4Q16. We assume an USD1b job wins from RAPID (1/3 secured).

Focus is on the RE’s transformation

2016-18 will be perceived as business-in-transition, anchored by its existing, cyclical order backlog. The key investment thesis to KNM is its transformation into a RE play, which offers a more secured, recurringbased income model. The 72%-owned Thai ethanol project will contribute from 3Q16 whilst its 80%-owned Peterborough Phase 1 operations are scheduled to kick off in 1Q18.
Source: Maybank Research - 27 May 2016

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