- We maintain our HOLD call on KNM Group with an unchanged fair value of RM0.49/share based on a 35% discount to its adjusted book value estimate of RM0.75/share. Our diluted book valuation excludes the group’s RM744mil goodwill arising from the acquisition of BORSIG Beteiligungsverwal-tungsgesellschaft mbH (Borsig).

- We maintain KNM’s FY13F-FY15F net profit as the group’s order book level appears to be stabilising after its announcement yesterday that the group has secured new order intakes of RM307mil. In Feb, it announced a US$100mil (RM309mil) contract secured from Public Stock Company TAIF-NK for the supply of a Sulphur Recovery Unit for the Heavy Residue Conversion Complex located at Nizhnekamsk, Tatarstan, in the Russian Federation.

- KNM’s announcement revealed that its order book currently stands at RM2.4bil. This excludes the RM2.4bil Peterborough renewable energy project and RM600mil Sri Lanka waste-toenergy engineering, procurement and construction job, as their project commencements remain uncertain.

- But we understand that this order book has yet to account for KNM’s 1QFY13 revenue, which could be around RM600mil. Hence, we estimate that the group’s net order book is flat QoQ at RM1.8bil, which is unchanged over the past 3 quarters.

- While the news of these additional order wins is positive for KNM, we view that prospects of additional large wins remain opaque at this stage given the current weak global environment and deferment of Petronas’ final investment decision for the Refinery and Petrochemical Integrated Development in Pengerang, Johor to 1Q2014 from June this year.

- We remain concerned of KNM’s erratic earnings track record, with its audited FY12 earnings indicating that the group’s 4QFY12 pre-tax results would have been a RM40mil loss (See Chart 1) instead of an earlier reported RM9mil pre-tax profit.

- The group had to secure a US$45mil (RM135mil) 30-month loan facility from Export-Import Bank of Malaysia Bhd to part finance and guarantee the performance of Tartarstan Sulphur Recovery Unit. Hence, we are also concerned about the group’s cashflow and capability to undertake new projects given that its proposal to issue RM1.5bil Sukuk bonds had been aborted.

- Note that our forecast net profits are 11%-12% below street estimates, as we remain concerned about the group’soperating margins against the backdrop of weak order book replacement prospects. The stock currently trades at an adjusted PBV of 0.8x, which is at the lower range of its 0.6x-1.1x over the past three years.

Source: AmeSecurities