KNM's FY11 results were within our expectations as we hadearlier  anticipated a net loss of aboutRM70.0m. The loss was mainly attributed to intense competition, especially inthe mid to lower end process equipment range, provisions made for foreseeablelosses and credit impairment. Although the company has  a RM5bnstrong orderbook  and atenderbook  worth over RM17.0bn, we haveyet to see these figures translate into positive bottomline contribution. Assuch, we continue to hold a negative outlook on KNM. Maintain Sell.

Within estimates.KNM's FY11 results were below consensus but within our expectations, as we hadearlier projected the company will  makea net loss of  some RM70.0m. Although its4QFY11 revenue of RM579.8m was 30.2% higher  q-o-q  due to higher revenue recognition from itsexisting and new projects, it only managed to report a small net profit ofRM3.0m. This was due to the intense competition in the mid to lower end process equipment segment as well as provisionsmade for foreseeable losses.  Furtheraggravating the already weak FY11 numbers is the presence of  some credit impairment, which led to a netloss of RM83.4m compared with net profit of RM118.2m in FY10.

Business environmentcontinues to be challenging. Despite the recovery in crude oil price toabove USD100/barrel,  we believe thebusiness environment for process equipment manufacturers remains challengingdue to the intense competition, which may spark off a  price war in which the winners would be thecustomers.  Also, we think the recoveryin the global O&G industry is still slow and has yet to catch up with thepace in mid-2008  when oil price  soared to a record  USD147/barrel. As such, the oversupply of processequipment will continue to  preventprocess equipment manufacturers from reaping healthy product margins.

Maintain Sell.Our fair value for KNM remains  unchangedat RM0.80 based on  the existing PER of13x FY12 EPS. Although the company has a strong orderbook exceeding RM5.0bn andtenderbook  worth more than  RM17.0bn, we have yet to these numbers  translate into positive bottomlinecontribution. That said, we continue to hold a  negative view on KNM'soutlook going forward.

Source: OSK188