Highlights

• We meet up w ith KNM recently and below are our key takeaw ays:

• The group is c lose to f inalizing details for the f inancing of the Peterborough renew able energy project in UK and expects commencement of facility in end 2017. KNM is also the contractor for the project and current ly the EPCC is halfw ay through. EPCC contribut ion for the project w ould be minimal for the group as only 20% MI portion w ould be recognised as revenue at the group level. Therefore, signif icant contribut ion f rom this project w ould only be felt f rom 2018 onw ards. KNM has on 11 May 2016, accepted the of fer f rom Export- Imp ort Ban k of Ma laysia Ber had (“EXIM”) f or an Oversea Pr oject Financ ing (“OPF”) Facility f or GBP35 millio n (ab out RM20 3.7 million). Posit ive new s for us but this is not the 100% debt f inancing for the overall Peterborough project. Conf irmat ion of f inancing for the remaining portion of the project CAPEX w ould a catalyst to the company.

• Bio-ethanol project in Thailand is close to completion and is expected to commence operat ions earliest by end September 2016. How ever, to be conservative, w e believe project commencement w ould be delayed further to next year as the group is still in talks w ith several potent ial clients (i.e. petroleum product retailers) in Thailand to commit purchase volume of ethanol to be produced f rom the plant. EPCC is near the tail end and w e do not expect any construction prof it f rom this project.

• We understand that KNM w as advised not to have single customer taking up 100% of the ethanol plant product ion capacity to avoid customer concentration risk. On top of that, concerns on pressure on ethanol pr icing to erode margins for the project is overdone as its input cost (cassava or molasses) is also in a dow ntrend. On top of that, the company is looking at cost-plus method to price its ethanol, w hich reduces the volat ility of prof it margins to be made on selling ethanol. Payback of the project is expected to be at 7 years.

• Orderbook of the group is at RM5bn (circa RM2bn f rom Peterborough EPCC). Str ipping out Peterborough contract, ef fective orderbook w ould be at RM3bn, implying coverage rat io of 1.8x. The group has announced a contract w in last Friday amount ing to US$23.2m for fabrication of vessels and columns w ith durat ion ranging 16 to 18 months. This is deemed w ithin expectat ions as w e have already built it RM800m contract replenishment this year. Forecast

• We cut our FY16 net prof it forecast by 23% to factor in slow er recognit ion of its process equipment sales in view of weaker than expected demand in the current O&G dow nturn. Catalysts

• i) Announcement of more RAPID contract w in(s); ii) Financial closing of EnergyPark Peterborough; iii) Additional contribution f rom Renew able Energy business in Thailand and/or f rom JV w ith Hansol.

Risks

• Fluctuat ion in oil price; Project execut ion ability; Delay in contracts aw ard.

Valuation

• The stock is dow ngraded to a Hold f rom Buy based on low er TP of RM0.49 pegged w ith unchanged FY16 11x PER due to uncertainty about its upcoming renew able energy project timing and headw inds in its process equipment business.
• Our TP has not yet factored in value f rom EnergyPark Peterborough and Thailand’s renew able energy business.

Source: Hong Leong Investment Bank Research - 16 May 2016