- We maintain our HOLD call on KNM Group but with a lower fair value of RM0.49/share (vs. an earlier RM0.55/share), due to the widening of our discount to our adjusted book value estimate of RM0.75/share from 25% to 35%. Our diluted book valuation excludes the group’s RM744mil goodwill arising from the acquisition of BORSIG Beteiligungsverwaltungsgesellschaft mbH (Borsig).

- As we had forewarned in our report on 26 February this year, KNM’s FY12 audited net profit of RM82mil was 37% below the RM131mil unaudited figures which were released two months ago. The cut in the earnings came from:- 1) RM36mil impairment of goodwill, deferred tax asset, fixed assets and contingency cost provisions for the group’s wholly-owned Brazil operating units. 2) RM7mil provision for foreseeable losses, and 3) RM7mil provision for additional doubtful debt.

- This means that the 4QFY12 pre-tax results would have been a RM40mil loss instead of a RM9mil pre-tax profit, as earlier reported. If the RM13mil reversal for provisions for foreseeable losses in the previous year were further excluded, 4QFY12 losses would have widened to RM53mil. Hence, we have fine-tuned FY13F-FY15F earnings due to the audited FY12 figures. Note that our forecast net profits are 11%-13% below street estimates, as we remain concerned about the group’s operating margins against the backdrop of weak order book replacement prospects.

- Even though the group has successfully acquired the GBP25mil (RM124mil) Peterborough land in the UK with a UOB credit facility, we note that the commencement of the project is still uncertain as it still requires a massive GBP233mil (RM1.2bil) for the first phase involving a 35MW waste-to-energy plant and a larger GBP251mil (RM1.2bil) for Phase 2’s additional 55MW.

- We are also concerned about the group’s cashflows and capability to undertake new projects given that its proposal to issue RM1.5bil Sukuk bonds has been aborted. Given corporate governance issues arising from a legal case by related party Mission Biofuels against the group, KNM’s founder/substantial shareholder Lee Swee Eng’s position has been re-designated from group managing director to CEO.

- The group still plans to list its 100%-owned Borsig in Singapore to raise further cash proceeds this year but no submission has been made at this juncture to the authorities as we understand that management is waiting for the auditor in Singapore to revert on Borsig’s German-based accounting policies. We continue to view the group’s indicative valuation of RM1.8bil-RM1.9bil for Borsig (which is currently operating at full capacity and unlikely to experience much growth), as too high at FY12 PE valuation of 16x-17x, while the rest of the group’s operations are currently suffering losses.

- The stock currently trades at an adjusted PBV of 0.6x, which is at the lower range of its 0.6x-1.1x over the past three years.

Source: AmeSecurities