KNM's 9MFY12 results came in above our and consensus expectations, largely due  to  exceptional  items  and  the  tax  credits  it  was  given  over  the  acquisition  of  Borsig  in  2008.  We  are  raising  our  FY12f-FY13f  earnings  by  58.5%  and  18.9%  respectively  to  incorporate  the  tax  credits  in  FY12  and  productivity  initiatives  in  FY13. Nonetheless, we are retaining our NEUTRAL recommendation on the stock  and  revising  our  fair  value  (FV)  downwards  to  RM0.49  due  to  the  assumption  of   the full conversion of its 488.0m warrants listed yesterday.  

3QFY12  results  still  skewed  by  exceptional  items  and  tax  credit.  KNM's 9MFY12  core  net  profit  came  in  above  our  and  consensus  estimates,  largely  due  to  the  tax  allowance  of  RM75m  recognized  this  quarter  coupled  with  improvements  in  its  Asia  &  Oceanic  and  Europe  segments,  higher  job  progress  recognition  from  a  stronger  orderbook and stable margin contributions from its projects. To recap, KNM was given a  tax  allowance  when  it  acquired  Borsig  back  in  2008  and  we  understand  that  it  will  recognize the final tax allowance of RM25m in 4QFY12, bringing to total tax allowance  for this year to RM100m. The management does not expect any further tax allowances  for its acquisition moving forward. After stripping the tax allowance this quarter, net profit  would had been lower by some RM18.9m.

Raising  FY12-13  earnings  forecasts  by  58.5%  and  18.9%  respectively.  We  understand that KNM will recognize a total of RM100m in deferred taxes in 4QFY12 due  to the tax allowance given for its acquisition of Borsig in 2008. Hence, we are raising our  FY12  estimates  by  58.5%.  As  for  FY13,  we  are  raising  our estimates  by  18.9%  due  to  the possibility of operational improvements in its business next year, supported by cost  efficiencies and productivity initiatives and as well as the recovery of its business in the  Europe and Asia & Oceanic segments.

Lowering  FV  to  RM0.49.  Incorporating  the  increase  in  our  FY13  earnings  and  the  assumption of the full conversion of its 488.9m warrants that were listed yesterday, we  are  trimming  our  FV  from  RM0.55  to  RM0.49  though  maintaining  the  NEUTRAL  recommendation on the stock given the limited upside to our valuation.

Source: OSK