Results

• Slightly Above: 4QFY14 core profit surged by 140% YoY bringing full year earnings to RM70m, making up 106% our and consensus forecast. Deviation

• In 4QFY14, we have stripped out the one off share based expenses of RM7.4m and impairment of goodwill of RM6.7m.

Highlights

• FY14 revenue fell 6% YoY but PBT increased by 170% mainly due to improve margin from Asia and Europe coupled with cost savings from the disposal of Brazil business in July 13. Asia region remain slow due to lower work progress but expected to pick up due to contract wins from RAPID project.

• To note, KNM has announced the disposal of its loss making business in Australia and expect to be completed in Feb 15. This will result in an estimated gain of RM23m in FY15 and help to improve recurring EBITDA level by RM44m per annum.

• In term of balance sheet, net debt/EBITDA fell from 3.4x to 1.6x and interest cover also increased from 2.1x to 5.6x. Net gearing at only 0.27x and expect to improve further after 1 for 5 right issue completion in April 15. With the lesson learned from the 2008 global financial crisis, we believe the measures of de-leveraging and strengthening its balance sheet will help to gain investors’ confidence.

• The declining global oil price should not markedly affect its business given its focus on the downstream. With the RAPID project proceeding, we expect to see continuous contract newsflow. We understand that KNM has a good chance to secure subcontractor jobs from some refinery package in the near term.

• We also 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

• Unchanged.

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; and 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 with target price raised from RM0.75 to RM0.88 after rolled forward valuation to FY16 based on unchanged 11x P/E.
• Our TP have not factored in value from EnergyPark Peterborough yet.

Source: Hong Leong Investment Bank Research - 26 Feb 2015