Earnings lowered, cut TP

9M16 results came in below, mainly due to persistent setbacks at its Canadian operations in 3Q16. For that, we cut 2016/17 earnings by 31%/24%. Accordingly, we cut our EV/backlog-based TP to MYR0.65 (-19%) on: (i) lower orders assumption by 20% to MYR2b and (ii) rolling over our net debt base year to 2017. KNM’s ability to raise cash in this cyclical downturn is commendable, fuelled by its transformation into a renewable energy (RE) play, a major catalyst. BUY.

QoQ weakness; continued losses at Canadian ops

3Q16 core net profit of MYR4m (-46% QoQ; +54% YoY) took 9M16 core earnings to MYR25m (-15% YoY), at 60%/61% of our/consensus full-year forecasts. The QoQ weakness was mainly due to higher losses (9x to – MYR10m) suffered at its Americas ops and lower EBITDA at its Asia & Oceania operations (-70%). These offset the stronger performance at its Europe operations (+30%), fuelled by its Borsig facilities in Germany.

Canada ops a major drag

Its Alberta-based operations in Canada have been badly hit by the cyclical downturn. It has yet to secure any new orders year to-date with high overheads (MYR40m p.a). Its Alberta operations have, in the past, secured orders worth about CAD50m p.a.. Having said that, the adverse situation is unlikely to improve over the next 12 months and KNM is undertaking a stringent opex cut review to partially allay this setback.

A RE transformation play; a catalyst in the making

2017 will be the year for KNM to progressively catalyse its efforts in the RE market. Its bio-ethanol plant, a 200k-litres/day cassava-based plant in Chachaengsao will commence operations in 1Q17 and is expected to contribute about MYR10m-15m in earnings p.a., based on its 72% stake. Its 80%-owned Peterborough Phase 1 (£151m capex) is scheduled to commission operations in 4Q17, with the first power export planned in 1Q18. The Phase 1 is projected to deliver MYR50m p.a. in earnings.

Source: Maybank Research - 25 Nov 2016