INVESTMENT HIGHLIGHTS

• KNM Group’s 3QFY17 reported earnings increased by +17.4%yoy to RM1.3m

• Third consecutive quarter of positive earnings

• Americas segment turned EBITDA positive

• Maintain NEUTRAL with a revised TP of RM0.22

Earnings within estimates. KNM’s 3QFY17 reported earnings increased by +17.4%yoy to RM1.3m. Cumulative 9MFY17 earnings of RM3.8m kept pace with our expectations, making up 73% of our full year FY17 earnings forecasts. Despite the commendable earnings, 9MFY17 revenue declined by -15.9%yoy largely due to lower project percentage of completion recognised as the projects related to the Pengerang Integrated Petroleum Complex are either delivered or nearing completion.

Asia & Oceania. Both segment revenue and EBITDA are still under stress, declining by -60.4%yoy and -92.6%yoy due to slower replenishment of new orders. Management noted that the bio-ethanol plant in Thailand has commenced commercial operations in September 2017.

Europe. The European front continues to perform, with revenue increasing to RM894.5m and EBITDA sustaining at RM163.3m.

Americas. Losses from the Americas are declining, albeit at a slow pace with lower operating expenses.

Impact on earnings. No change to earnings estimates.

Maintain NEUTRAL. We are maintaining our Neutral stance on KNM with a revised target price of RM0.22 per share (previously RM0.21). Our revised valuation is based on EPS18 of 1.3sen pegged to PER18 multiple of 17x (previously 15x). Our target PER is derived from a 0.25-standard deviation discount to KNM’s 5-year historical average PER. The outlook of the company is improving slightly with the construction of the Peterborough Green Energy Project in the UK. Despite this, the larger operating environment 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 - 27 Nov 2017