Journey to Wealth
KNM Group Bhd - 3Q12 results meets expectations
Period 3Q12 / 9M12
Actual vs. Expectations The 9MFY12 profit before tax (PBT) of RM60.6m was within our expectations, making up 74% of our FY12 PBT estimate of RM82.4m. However, it came in above the consensus's expectation at 90% of its estimate of RM67.0m.
We are reviewing KNM's results on a PBT basis to exclude the impact of its tax credit. FY12 is the last year KNM is expected to report a positive tax credit.
Dividends No dividend was declared.
Key Results Highlights QoQ, the 3Q12 PBT rose +5.2% as the company continued to phase out legacy contracts (won in 2009-10 with subpar margins) which was the cause of losses for most of 2011.
YoY, the 3Q12 PBT was also up (+>100%), mainly due to the operational turnaround given the reduction in the loss-making projects above.
Geographically, there was a significant jump in EBITDA margins for the Asia & Oceania segment mainly due to the execution of some high-margin projects (i.e. EPC contract from Lukoil). However, the Europe division saw an erosion in EBITDA margin due to the late deliveries of several projects. The America division saw a significant drop in its EBITDA margin as well, due to some additional costs incurred to complete several projects.
Outlook An analyst briefing will be held this coming Thursday (22nd Nov).
FY12 earnings are expected to be in the black due to 1) the legacy loss-making projects being completed within CY12 and 2) efforts undertaken to improve cost efficiency and productivity.
Some plant capacity rationalisations are expected as certain plants (e.g. Brazil/Indonesia/Australia) seem to be suffering from low utilisation.
The Peterborough and Octagon projects are currently at status quo. However, the company has targeted to secure financing for Peterborough soon.
Change to Forecasts No changes to our forecasts at this juncture.
Rating Maintain MARKET PERFORM.
Valuation Based on an unchanged 9.0x targeted PER on CY13 EPS of 5.9sen sen, we are maintaining our fair value of RM0.53.
The discount to the sector's average PER of 15x is due to the significant earnings risk present given KNM's historical bottom line volatility.
Source: Kenanga
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