News

• KNM received a letter of award (LOA) of EPCC contracts for waste-to-energy facility at Beddington Lane, Croydon, UK. The cont ract amount is 88m pounds or approximately RM581m with contract duration of 27 months. Financial Impact

• This is the third contract announcement in 6 months, bringing year to date win to circa RM1bn. With estimated gross margin of 20%, we expect the contract to contribute 15m or 16% to the bottom-line.

• Together with this contract win, KNM has secured about RM2bn worth of EPCC contract locally since 2H14. We have factored in RM2.2bn cont ract win for RAPID related job over 4 years or RM540m per annum. With this contract win, our orderbook replenishment assumption target already met, any contract win from RAPID going forward will raise our earnings forecast.

Pros/Cons

• We were surprised by the cont ract wins given that this is an EPCC contract win outside of RAPID. We remain positive on its fundamental given ability to replenish its orderbook amidst low oil price environment with the support of contract flows from RAPID. In addition, KNM was also awarded the O&M contract for waste-to-energy facility above but value is not disclosed.

• Together with UK Peterborough, we will see the company transform from project based earnings to more recurring income, which will be another re-rating catalyst.

• We understand that 2HFY15 earnings might not be exciting mainly due to timing of commencement of EPCC contract. We expect to see significant earnings contribution in FY16 and FY17 from RAPID and potential upside risk to our forecast.

Catalysts

• i) Announcement of more RAPID cont ract 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 - 8 Oct 2015