Results

• Inline: 1QFY15 core profit surged by 67% YoY, making up 25% our and consensus forecast. Deviation

• In 1QFY15, we have excluded RM22m gain from disposal of Australia business and added back one off share based payment of RM1.4m and defer tax of RM16.6m.

Highlights

• 1QFY15 revenue fell 30% YoY but core PAT increased by 67% mainly due to improve margin from Asia after disposal of loss making Australia business. This disposal has resulted in one-off gain of RM22m and help to improve recurring EBITDA level by RM44m per annum.

• QoQ: Asia region revenue increased by 21% due to initial job progress from RAPID project and expected to recognise higher contribution in 2H15.

• YoY, net debt/EBITDA fell from 2.5x to 1.7x and interest cover improved from 2.6x to 7x. Net gearing is only 0.29x 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.

• We understand that KNM has a good chance to secure another RM400m subcontractor jobs from some refinery package in the near term. Total contract win from RAPID currently is around RM1.2bn.

• In addition, the completion of acquiring Thailand’s ethanol business should add RM22m to bottomline in FY16 for Phase 1. Potential Phase 2 will double the capacity with capex estimation of 50% of Phase 1.

Forecasts

• FY15 and FY16 EPS reduced by 12% and 9% respectively after factored in dilution from rights issue shares.

Catalysts

• i) Announcement of more RAPID contract win; ii) Commencement 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 adjusted from RM0.88 to RM0.80 after factored in dilution of rights issue shares based on unchanged 11x FY16 P/E.
• Our TP have not factored in value from EnergyPark Peterborough and Thailand’s renewable energy business yet.

Source: Hong Leong Investment Bank Research - 22 May 2015