INVESTMENT HIGHLIGHTS

• KNM Group’s 1QFY17 reported earnings climbed back into the black at RM1.9m

• Normalised earnings however remained in the red at approximately –RM14m

• Losses still recorded from the Americas

• Maintain NEUTRAL with revised TP of RM0.27 per share

Slow work orders hamper earnings. KNM’s 1QFY17 reported earnings climbed back into the black at RM1.9m. Normalised earnings excluding reversals of impairments of doubtful debts, forex gains, derivative gains and warranty claims however remains in the red at approximately –RM14m. This is admittedly a far cry from our and consensus FY17 earnings estimates. The dismal results rose from low activity levels and earnings recognition.

Asia & Oceania. Both 1QFY17 revenue and EBITDA slumped by - 40.6%yoy and -57.8%yoy due to slow replenishment of new orders.

Europe. The European segment performed slightly better, albeit still registering a decline in revenue and EBITDA at RM249m and RM27.9m respectively due to lower percentage of project completion.

Americas. The Americas segment continues to disappoint as revenue sank by -63.8%yoy to RM8.1m while registering an LBITDA of – RM4.3m.

Impact on earnings. Due to the continuous earnings stress from low project execution, low order replenishment and depressing profit margins, we are reducing our FY17 and FY18 earnings estimates to RM27m and RM35.4m respectively.

Maintain NEUTRAL. We are maintaining our Neutral stance on KNM with a revised target price of RM0.27 per share. We roll forward our valuation base year to FY18 pegging EPS18 of 1.8sen to PER18 multiple of 15x. Our target PER is derived from a 0.5-standard deviation discount to KNM’s 5-year historical average PER. We turn bearish on the stock as the company’s operating environment remains challenging in all of its key operating markets with low jobs orders, low activity levels and uncertain earnings visibility. A potential rerating catalyst could be its cash generating power assets outside Malaysia.

Source: MIDF Research - 1 Jun 2017