We are bringing a closure to our previous ‘Trading Buy’ call on KNM given its unexciting prospect marred by slower replenishment of new orders, especially from the Americas as well as Asia & Oceanic segments, coupled with delay in its renewable energy projects. We are projecting FY17-18E CNLs of RM7.7-5.1m. Not Rated with a Fair Value of RM0.28 based on 0.3x FY18E PBV.

Disappointing earnings performance. Recall that we issued a “Trading Buy” call on the process equipment manufacturer, KNM Group Bhd (KNM), in April last year. The share price had dropped >40% since then due to poor earnings results. It registered core net loss of RM97.1m in FY16, and in 1Q17 it posted a net loss of RM3.3m, slipping from a profit of RM9.5m in 1Q16. We opine that the weak set of financial results was in tandem with 18% YoY weaker top-line dragged by lower process equipment fabrication jobs secured.

Commercialising Thailand bioethanol plant by 2H17. KNM is working towards the commercial production of its 72%-owned ethanol plant by 2H17, which was delayed for more than a year. In early May this year, KNM kick-started its Impress Ethanol Plant (IEL) phase 2 project by awarding the EPCC work of 300k litre/day plant amounting to RM159m to its own fabrication arm, bringing its total capacity to 500k litre/day. The phase 2 plant is slated for completion by 2H19. Assuming 85% utilisation on the 200k litres/day cassava-based bioethanol plant, it would generate earnings of c.RM15m for 12 months of operations.

Further delay in Peterborough project. We gathered that KNM is still eyeing to secure the financing of c.GBP50m to commence the construction work. Meanwhile, KNM is also in the midst of seeking advice from consultants to review and upgrade the technology of the waste-to-energy plant, allowing it to take in more raw waste instead of sorted wastes. Given the abovementioned reasons, we believe the project will be further delayed for at least 6 months to 1 year. Based on our initial estimates, the first-phase plant with a capacity of 17.6MW is able to generate bottom-line of up to RM30m.

Weaker order-book replenishment. KNM’s outstanding orderbook dropped to RM1.3b from RM2.8b a year ago with contract win of >RM300m as of 1Q17. Going forward, we reckon that replenishment of new orders will remain slow, especially from the Americas as well as Asia & Oceanic segments. In the local scene, KNM also do not benefit much from the ramping up of activities from RAPID in Pengerang; thus, KNM is focusing on execution of EPCC of renewable energy projects at the fabrication arm in Kuantan.

Not Rated at RM0.28. We are projecting FY17-18 to stay in the red with core net losses (CNL) of RM7.7m-5.1m assuming: (i) RM1.0m/annum order-book replenishment, and (ii) commencement of IEL plant phase 1 by 2H17. Meanwhile, we are closing our previous position for KNM with a Not Rated call at a Fair Value of RM0.28 based on FY18E PBV of 0.3x (-1.5SD 5 year Fwd PBV), switching from price-earnings valuation model as it might incur losses in FY17-18. Note that our FV assumes no conversion of shares from out-of-money warrants. Risks to our call are: (i) higher-than-expected order-book replenishment for its fabrication arm, (ii) higher-than-expected earnings contribution from the IEL plant in Thailand, and (iii) successful execution of Peterborough plant in the near term.

Source: Kenanga Research - 13 Jun 2017