Results

• Inline: 3QFY14 core p rofit surged by 250% YoY and 87% QoQ bringing 9MFY14 core profit to RM52m, making up 79% our and 78% of consensus forecast respectively.

Deviation

• In 3QFY14, we have stripped out the one off share based expenses of RM5.5m.

Highlights

9MFY14 revenue was flat YoY but PBT has increased by 180% mainly due to improve margin for Europe and America coupled with cost savings from the disposal of Brazil business in July 13. Asia region remain slow due to lower work job progress but expected to pick up due to contract wins from RAPID project.

We believe the recent share price s ell down due to conc ern on declining oil price is overdone. The fluctuating global oil price should not markedly affect its business given its focus on the downstream. In addition, we see continuous newsflow on RAPID which signal works are on track for commencement of operation in early 2019. Just to give some comfort to investors, KNM’s balance sheet position has improved significantly since 2012, with current ratio improve from 0.8 to 1.3x and net debt/EBITDA fell from 3.4x to 2.3x and expect to further drop to 1.7x in FY15. Net gearing only at 0.3x. With the lesson learned from the 2008 global financial crisis, the company is likely to continue de -lev erage and strengthening its balance sheet.

As the long term fundamentals and prospects remain intact, current share price only trading at 8x FY15 P/E which present buying opportunity with potential upside of 66%.

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 1H15. We understand that KNM has a good chance to secure subc ontractor jobs from some refinery package in the near term.

We reassured that EnergyPark Peterborough project remain on track with some ground and minor construction works started. It expects to 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

• On track to achieve of our FY14 earnings of RM66m but reduced our FY15 earnings by 11% after factored in deferment in some contract win from RAPID to 1H15.

Catalysts

• i) Announcement of more RAPID contract win, ii) Kicking start 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 but target price reduced from RM1.35 to RM0.98 based on lower P/E of 13x (vers us 16x previous) inline with our target P/E de-rating for O&G companies due to weak sentiment amidst declining oil price. Our TP have not factored in value from EnergyPark Peterborough yet.

Source: Hong Leong Investment Bank Research - 27 Nov 2014