News

• KNM has allocated THB1.3bn (circa RM159m) for the construction of Phase 2 fuel-grade Impress Ethanol Plant in Thailand.
• The capacity of the original Thai bio ethanol project (Phase 1) is 200,000 litres/day. Phase 2 (with construction duration of 18 months) will bring the plant’s production capacity to a total of 500,000 litres/day. Financial Impact
• Overall a positive to the group as the investment of the 2nd Phase of the bio ethanol project signifies the successful implementation of the Phase 1 project, which has been recently completed in early May 2017. The project is expected to provide long term recurring income to the group.
• The risk of project cost overrun would be minimal for the group as the EPCC work of the plant would be carried out by the group’s internal EPCC arm.
• Earliest earnings contribution from this project is only expected in 2019. The magnitude of earnings is also dependent on ethanol pricing (selling price) and also cassava pricing (feedstock price).
• Based on assumptions of ethanol selling price of THB23/litre and cassava cost of THB5,600/tonne, the expected profit contribution of 2nd Phase project is estimated to be RM15m, which is in addition to 1st Phase expected contribution of RM10m.
• We are positive on the announcement. However, we do not discount the possibility of delay in commencement of Phase 2 project, as witnessed in Phase 1 (which has been delayed for 1 year).

Forecast

• Maintained.

Rating

BUY (↑ )

• We upgrade to BUY from SELL post severe share price retracement after our previous downgrade.
• Valuation appears to have bottomed post dismal results posted for FY16. We believe the worse is over for the group and expect a better FY17 ahead in anticipation of stabilisation of oil prices and maiden contribution of Thai bio ethanol project Phase 1 which would provide recurring earnings base for the group.

Valuation

• TP is maintained at RM0.32 based on 11x FY17 PER. Valuation is at extreme low at 0.2x PBV and outlook is set to improve in 2017.

Source: Hong Leong Investment Bank Research - 15 May 2017