We maintain SELL on KNM Group with an unchanged fair valueof RM0.75/share pegged to an FY12F PE of 10x ' a 30% discount to the oil &gas sector's 15x. 

We maintain FY12F-FY13F net profits for now with the expectationsthat KNM would start afresh on a clean slate next year on the back of new orderaccretions. Note that we are projecting an FY13F earnings decline of 9% due to theend of the recognition of the Borsig tax incentive. Hence, our FY12F-FY13Fearnings are currently 22%-53% below consensus.

We introduce FY14F earnings with a growth of 30% largely dueto a 5% increase in new order assumption and a 1ppt- improvement in fabricationmargin.

KNM's FY11 net profit loss of RM83mil was not a surprise, comingin within our and street expectations. The residual provisions for the group'sprojects were largely expected following the group's shocking 3QFY11 net lossof RM116mil.

OoQ, KNM's 4QFY11 pre-tax loss plunged to RM11mil from RM145milin 3QFY11, which had provisions that included RM80mil for cost overruns onvarious projects in Asia and Oceania and RM50mil for doubtful debt write-offs.We understand that KNM was still in the red due to additional provisions ofRM30mil in 4QFY11.

KNM has recently entered into an option agreement to acquirea 55-acre vacant land for the RM2.2bil Peterborough Renewable Energy Ltd (PREL)project. With the land ownership, we understand that KNM could possibly end upwith an 80% stake (with the balance held by UK-based sponsors) in thiswaste-to-energy concession if the group could secure external borrowings. Thismay be a negative development as this huge project will likely elevate thegroup's current net gearing level of 0.5x to 0.9x, unless other investorsdilute KNM's equity stake to an associate level. 

KNM's current order book stands at RM5.8bil, with new orderssecured up to RM1.8bil for this year and tendering up to RM18bil potentialorders. But as the order book includes (1) the RM2.2bil Peterborough RenewableEnergy Ltd (PREL) project, (2) RM908mil Lukoil contracts in Uzbekistan, and (3)the recently awarded US$200mil (RM638mil) waste-to-energy Sri Lankan EPCC jobfrom Octagon Consolidated, we note that over half of the group's order bookdoes not have clear visibility in commencement.

Normalising tax rates, KNM currently trades at a pricey FY12FPE of 30x, way above the oil & gas sector's. This is unjustified givenKNM's persistently poor quarterly earnings delivery.

Source: AmeSecurities