INVESTMENT HIGHLIGHTS

• KNM Group’s (KNM) 3QFY18 reported losses of –RM18.7m

• Normalised losses -RM15.8m

• Earnings supported by new bio-ethanol plant in Thailand

• Diversification into renewable energy bearing fruit

• EBITDA positive on key geographic segments

• Maintain TRADING BUY with a revised TP of RM0.19 per share

Earnings supported by bio-ethanol plant. KNM’s reported net loss of –RM18.7m in 3QFY18 due to: (i) unrealised losses on foreign exchange and; (ii) tough overseas operation during the quarter. Excluding unrealised losses on foreign exchange and derivative losses, KNM’s normalised losses amounted to -RM15.8m for the quarter. This brings its 9MFY18 losses to -RM47.673m. Revenue grew by +3.0%yoy supported by the bio-ethanol plant in Thailand that began operation in September 2017.

Asia and Oceania. Segment revenue surged by +214.0%yoy largely attributable to the sales of bio-ethanol plant in Thailand. However, segment EBITDA dipped due to additional depreciation arising from the bio-ethanol plant in Thailand, lower gross profit margin and; lower foreign exchange gain contribution due to weaker Ringgit.

Europe and Americas. Segment revenue and EBITDA showed signs of recovery with increased orders secure as well as; higher revenue contribution with a higher profit margin. That said, the condition in America remains difficult despite the narrowing losses due to lower operating expenses.

Impact on earnings. We are revising our FY18-19F earnings to – RM1.4m and RM23.2m respectively as we are expecting operating environment to remain challenging for KNM.

Maintain TRADING BUY. Despite the losses, we are positive on the upbeat global crude price, lower operating expenses and the increasing contribution from its bio-ethanol plant in Thailand. Hence, we are maintaining our TRADING BUY stance on KNM with a revised target price of RM0.19 per share. Our TP is premised on PER19 of 17x pegged to EPS19 of 1.1sen. Our target PER is derived from a 0.25-standard deviation discount to KNM’s 5-year historical average PER. Additionally, the outlook of the company is improving slightly with the construction of the Peterborough Green Energy Project in the UK.

Source: MIDF Research - 29 Nov 2018