Results

• Broadly Inline: 3QFY15 core profit increased 6% YoY and 161% QoQ, bringing 9MFY15 core profit to RM63m, making up 68% our and consensus forecast. Deviation

• We deemed the result to be broadly inline as the earnings recognition tends to be patchy due to timing difference in profit recognition for its contracts.

Highlights

• 3QFY15 core profit (excluded RM1.3m share-based payment and deferred tax of RM19.5m) increased 6% YoY and 161% QoQ. To note, profit has yet to be recognised for the RAPID project due to its early stage of fabrication.

• RAPID project is the only bright spot in the oil and gas sector as upstream outlook remains sluggish given the cut in Petronas capex and opex amidst low oil price. We maintain our view that KNM is the one of the main beneficiaries from RAPID given its exposure to supply process equipment. Recently, Petronas Chemical has awarded a US$482m EPC contract to build two polypropylene units. This also suggests that contract tenders for petrochemical plants have started and will provide continuous contract newsflow for the sector.

• KNM has secured a total 3 contracts worth of RM1bn in 6 months and circa RM2bn worth of EPCC contract since 2H14. In addition, the company is tendering RM5bn worth of contracts from RAPID. We understand the company has high chance to secure some contracts from RAPID in near future. Our orderbook replenishment assumption target has already been met, hence any contract win from RAPID going forward will lead to further upgrade in our earnings forecasts.

• With the upcoming commencement of Thailand ethanol business and UK Peterborough renewable energy, the company will transform from project-based earnings to more recurring income, which will be another signi ficant long term re-rating catalyst. We estimate both projects to add at least RM0.30 per share to our TP.

Forecasts

• Unchanged.

Catalysts

• i) Announcement of more RAPID contract win; ii) Commencement of EnergyPark Peterborough; and iii) Relisting of Borsig to unlock value.

Risks

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

Valuation

• We maintain our BUY call with unchanged target price of RM0.67 based on unchanged 11x P/E. Our TP have yet to factor in value from EnergyPark Peterborough and Thailand’s renewable energy business.

Source: Hong Leong Investment Bank Research - 27 Nov 2015