Downgrade to SELL; TP cut to MYR0.23 (-54%). Results were below expectations, with 1Q13 net profit only accounting for 3%/2% of our (pre-adjustment)/Street FY13 estimates. The sub-par results were largely due to declining sales. We slash our FY13/14/15 earnings forecasts by 84%/51%/31% to reflect the poor 1Q13 earnings as well as the risk of weak order book replenishment and margin pressure over the next 12 months. Valuations are expensive (FY13 PER of 83x) post our earnings revisions, thus our downgrade to SELL. Our revised TP of MYR0.23 (MYR0.50 previously) is pegged to 8x FY14 (unchanged).

1Q13 results snapshot. 1Q13 revenue fell 16% YoY to MYR490m, while pretax profit/core net profit tumbled 82%/84% YoY to MYR2.9m/MYR2.6m. The weak numbers were due to lower job recognition and the absence of tax credits in 1Q13 (1Q12: MYR19m tax credit). The tax incentive accorded to Borsig expired in FY12.

Asia & Oceania, Americas dragged earnings. Geographically, the Asia & Oceania and Americas segments were the main drag to the group’s performance. Revenues fell 26% and 27% YoY to MYR178m and MYR12m respectively in 1Q13, reflecting the slowdown in orders. EBITDA from Asia & Oceania contracted 52% YoY to MYR8m on lower EBITDA margins (-2.6ppts to 4.7%) while the Americas division was in the red (-MYR0.5m). At 80% of group EBITDA, KNM’s European operations were the main anchor to earnings.

Order book replenishment and margin pressure are ongoing concerns. We slash our FY13-15 earnings forecasts by 31-84% following an 11-14% cut in revenue and as we shave 0.7-2.1ppts from our EBITDA margin assumptions. KNM’s dwindling order book is a concern. The value of workable backlog (excluding the Peterborough and Orizon projects) has slipped below MYR2b. Softening margins are also a worry, reflecting cost lumpiness and intense tendering. Meanwhile, we reckon KNM may defer the listing of Borsig on the SGX.

Source: Maybank Research - 31 May 2013