• 9M14 earnings in line at 70% of ours/consensus FY forecasts.
• Remodeling into an emerging renewable energy play.
• Maintain BUY and MYR1.20 TP (0.7x EV/order backlog).

What’s New

3Q14  core  net  profit  of  MYR21m  (+94%  QoQ)  took  9M14  core earnings to MYR48m (5.6x YoY) on track to meet ours/street’s  fullyear  forecasts  of  MYR68m.  3Q14’s  QoQ  growth  was  driven  by:  (i) higher  EBITDAs  from  its  Europe  (Borsig:  +11%)  and  America (Canada:  +109%) operations  and (ii) lower interest expense (-33%). This was offset by weaker revenue/EBITDA from  its Asia & Oceania operations (-30%/-27%) due to lower job progress recognition.

KNM  reported  an  exceptional  loss  of  MYR5m  in  3Q14,  mainly  on share  based  payment  from  the  implementation  of its  ESOS. This  is a  non cashflow  item,  accounting treatment.  Net  debt/gearing  was relatively unchanged, at MYR602m/0.3x in Sep 2014.

What’s Our View

Our  earnings  forecasts  are  unchanged.  We  expect  a  seasonally weaker 4Q14 (-5% QoQ in net profit) as works are expected to slow down  on  shorter  operating  days  (i.e.  festive  seasons  in  Oceania, Europe & Americas). 

We  project  KNM  to  secure  MYR2.2b  order  wins  annually  over  the next 3 years, a realistic target (3-year historical MYR2b wins p.a.). Meanwhile, awards of the RAPID refinery  sub-contracting  packages are  now  expected  in  4Q14-1Q15,  a slight  delay owing  to  extended negotiations  with  the  main contractors.  Tender  awards  for  RAPID’s petrochemical  packages  will  be  out  by  1H15.  We  remain  positive on KNM winning USD1b jobs from RAPID (clinched USD280m).

The  much  anticipated  Peterborough  renewable  energy  remains  a work-in-progress. KNM targets a technical closure by 1Q15. An offtaker has been identified and KNM intends to seek more renewable energy projects as it remodels  its  operations towards more  steady, recurring income base.

Source: Maybank Research - 27 Nov 2014