Results

Broadly Inline: 1HFY14 PBT surged by 6 folds to half way point of our full year forecast while core earnings up by 3x to RM30m, making up 45% our and consensus forecast.

Deviation

We deemed the result inline as we expect subsequent stronger quarters due to difference in timing of recognising project earnings.

Highlights

1H revenue up by 6% YoY due to positive environment in Europe region coupled with improved operation from Americas partly offset by weak Asia region due to lack of projects. YoY, EBIT margin more than double from 3% to 7.4% attributed to improve margin for Asia region and cost savings from the disposal of Brazil business in July 13.

YoY, on the balance sheet, current ratio continue to improve from 0.8x into 1.1x with net gearing at 0.28x. With the lesson learned from the 2008 global financial crisis, the company is likely to continue de-leverage and strengthening its balance sheet.

To recap, KNM has just won around US$280-300m worth of contract from RAPID. We believe this RAPID contract win is just the beginning of the earnings turnaround story and expect more to come as we expect RAPID contract newsflow to sustain until Jan 15.

We understand KNM has also submitted bid for subcontractors job for the other packages of refinery plant and EPCC contract for tank farms and other associated facilities. We expect more EPCC contracts (Petrochemical complexes, LNG Regasification Plant and associated facilities) to continue roll out in 3Q14 after site preparation, Cogeneration Plant and Raw Water contracts have been awarded to ensure PIC will be operational in time (early 2019). To note, there are potential more EPCC works if potential foreign investors commit their final investment decision on RAPID as PIPC is expected to attract RM170bn investment for next 10- 15 years.

The EnergyPark Peterborough project is progressing well with financial closure expected to be in end of 3Q14. It expects the construction of EnergyPark to start in 4Q14 and commence contribution in FY17. We estimate Phase 1 (18MW or 23% of total 80 MW) to add RM0.39 NAV per share to our target price.

Forecasts

Unchanged.

Catalysts

i) Announcement of more RAPID contract win,

ii) Financial closure of EnergyPark Peterborough,

iii) Strong quarterly earnings due to lower finance cost and sustained margin,

iv) Relisting of Borsig to unlock value.

Risks

Fluctuation in oil price; Project execution ability; Delay in contracts award.

Valuation

We maintained our BUY call and target price of RM1.35 based on unchanged 16x FY15 P/E, premium to its peers’ average target of 14-15x given strong earnings growth prospect (CAGR of 55% from FY14-FY16). Our TP have not factored in value from EnergyPark Peterborough yet.

Source: Hong Leong Investment Bank Research - 28 Aug 2014