News

• KNM announced its consortium (KNM and Hitachi) has been awarded EPCC contract from Cypark for the Solid Waste Modular in Negeri Sembilan.

• The contract value is RM268m with contract duration of 27 months. Financial Impact

• KNM’s portion of the contract is about RM134m. Including RM1.2bn cont ract win from RAPID, KNM has secured about RM1.33bn worth of EPCC contract locally.

• We maintain our earnings forecasts as we have already factored a total of RM2.2bn related cont racts replenishment or RM540m per annum based on contract duration of 4 years.

• We believe our assumption on orderbook replenishment is fai rly achievable as we understand the company is confident to secure another circa RM450m related contract in near future.

Pros/Cons

• We are positive on the contract wins given KNM ability to replenish its orderbook amidst low oil price envi ronment. We maintain our view that KNM, being among the largest process equipment manufacturer, should be one of the main beneficiaries of RAPID project.

• We understand that 3Q results will be better than 2Q as contribution from RAPID project will be gaining momentum in 2H15.

• 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.

Catalysts

• i) Announcement of more RAPID contract win(s); ii) Financial closing of EnergyPark Peterborough; iii) Additional contribution from Renewable Energy business in Thailand and/or from JV with Hansol.

Risks

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

Valuation

• We maintained our BUY call with unchanged target price of RM0.67 based on unchanged 11x P/E.
• Our TP have not yet factored in value from EnergyPark Peterborough and Thailand’s renewable energy business.

Source: Hong Leong Investment Bank Research - 1 Sep 2015