• KNM Group’s 4QFY16 unexpectedly dipped into the red netting losses in excess of-RM300m

• FY16 sales managed to maintain above RM1.6b

• Losses were from Kuantan base and Canadian oil sands

• Maintain NEUTRAL with lowered TP of RM0.35 per share

Unexpected losses deep into the red. KNM’s FY16 full year sales were on target, exceeding RM1.6b largely attributable to local jobs from RAPID project and sales from its European subsidiary. However, unexpected impairments on doubtful debts and assets written off along with losses in the Canadian oil sands and Kuantan operations pulled the group into losses amounting to –RM311.7m for FY16, surprising our and consensus estimates expectations of the group ending the year profitable.

Asia & Oceania. Both full year FY16 revenue and EBITDA declined by -22.8%yoy and -245%yoy respectively due to losses in Kuantan operations and unforeseen logistics costs incurred.

Europe. On the contrary, the European subsidiaries performed better, with revenue increasing by +13.1%yoy while reporting an EBITDA of RM94.6m.

Americas. The Americas segment continues to be in the red as revenue declined by -10.7%yoy and EBITDA remains in the loss position.

Impact on earnings. We continue to believe that the bulk of earnings from Pengerang RAPID projects will be recognised in FY17. However, due to the continuous stress faced by the Canadian oil sand from the Americas division, we are reducing our FY17 earnings estimates by -14.4% to RM49.1m.

Maintain NEUTRAL - medium term view positive. We are maintaining our Neutral stance on KNM with a revised target price of

RM0.35 per share (previously RM0.41). Our valuation is premised on EPS17 of 2.5sen to PER17 multiple of 14x. Our target PER is derived from a 0.5-standard deviation discount to KNM’s 5-year historical average PER

Sanguine on RAPID Pengerang. Our optimism on the RAPID project remains and we are still sanguine of more projects to arise from RAPID for KNM Group. We are however aware that earnings could be lumpy throughout the year.

Source: MIDF Research - 27 Feb 2017