KNM Group Bhd - Below Ours But Within The Consensus

kiasutrader

Publish date: Wed, 27 Feb 2013, 09:55 AM

Period 4Q12 /12M12

Actual vs. Expectations The 4Q12 profit before tax (PBT) of RM8.5m brought CY12 PBT to RM69.0m. This was below our expectations, making up only 84% of our FY12 PBT estimate of RM82.4m. However, it came in within the consensus estimate of RM71.6m (making up 96%).

We are reviewing KNM's results on a PBT basis to exclude the impact of its tax credit. FY12 is the last year that KNM is expected to report a positive tax credit.

The variance to our earnings estimate came from the: 1) lower-than-expected operating margins for FY12; and 2) higher-than-expected borrowing costs.

Dividends No dividend was declared and this was below our FY13 NDPS expectation of 0.25sen.

Key Results Highlights QoQ, the 4Q12 PBT was down 58.2% largely due to: 1) lower EBITDA margins earned at the Asia & Oceania division (4.6% from 12.2% previously); and 2) a higher interest cost (RM20.5m versus RM13.1m in 3QFY12), which we understand was due to a bridging loan taken out for KNM's previous rights issue. Management guided that the bridging loan had since been repaid. Hence, the interest cost is expected to normalise ahead.

YoY, the 4Q12 PBT was up (>100%), mainly due to turnaround in its operational. Recall that in 2011, it was hit by low-margin contracts and an excessive operating capacity that led to a loss of RM155.9m.

Outlook FY13 earnings are also expected to be in the black due to: 1) the legacy loss-making projects having been completed in 2012; 2) reduced costs as various efforts have been undertaken to improve cost efficiencies and productivities.

Some plant capacity rationalisations are expected as certain plants (e.g. Brazil/Indonesia/Australia) seem to be suffering from low utilisations.

The Peterborough and Octagon projects are currently at status quo. This is one of the key risks for the company given that the Peterborough project accounts for around 50% of the outstanding order book (est. c.RM4.3b).

Change to Forecasts We are maintaining our earnings estimates as we expect a normalised interest cost moving ahead. However, we are removing our NDPS estimates pending further guidance from the management in regard to the company's forward NDPS forecasts.

Rating Maintain MARKET PERFORM

Valuation Based on an unchanged targeted PER of 9.0x on the CY13 EPS of 5.9 sen, we are maintaining our fair value of RM0.53. The discount to the sector's average PER of 15.0x is due to the significant earnings risk present given KNM's historical high bottom line volatility.

While our target price implies an upside of >10%, we are keeping our MARKET PERFORM call given the uncertainty in regard to KNM's ability to realise its order book.

Risks 1) Inability to secure more contracts going ahead; and 2) The continued delay of its headline projects like Peterborough and Octagon.

Source: Kenanga

KNM (7164)

Related Stocks

Market Buzz

Discussions

Be the first to like this. Showing 0 of 0 comments

Featured Posts

MQ Trader

Introducing MY's First IPO Fund for Sophisticated Investors!

MQ Chat

New Update. Discover investment communities that resonate with your ideas

MQ Trader

M & A Value Partners IPO Equity Fund has been launched - Targeted 13% Return p.a

Latest Videos