INVESTMENT HIGHLIGHTS

• KNM Group’s 1QFY18 reported losses narrowed

• Normalised losses at –RM5.9m

• Contribution from bio-ethanol plant in Thailand seen

• Recurring income from power asset to gain traction

• EBITDA positive on key geographic segments

• Upgrade to TRADING BUY with a unchanged TP of RM0.22

Earnings support from bio-ethanol plant. KNM’s reported earnings of –RM18.4m is still under strain from: (i) high finance costs and; (ii) tough overseas operations. Excluding unrealised forex and derivative losses, KNM’s normalised losses amounted to only – RM5.9m. Revenue increase year-over-year by +3.4% supported by the bio-ethanol plant in Thailand that began operation in September 2017.

Asia & Oceania. Segment revenue increased +22.6%yoy largely attributable to the sales of bio-ethanol plant in Thailand. Segment EBITDA however dipped due to high unrealised foreign exchange losses.

Europe and Americas. Revenue and EBITDA from Europe is holding up but the condition in the Americas is still difficult.

Impact on earnings. As the EBITDA is still promising, we are maintaining our earnings estimates at this juncture.

Upgrade to TRADING BUY. Given the narrowing losses, lower operating expenses, upbeat global crude oil prices and traction achieved from its bio-ethanol plant, we believe that KNM is poised to perform better this financial year. As such, we are upgrading KNM to

TRADING BUY with and unchanged TP of RM0.22 per share. Our valuation is based on EPS18 of 1.3sen pegged to PER18 multiple of 17x. Our target PER is derived from a 0.25-standard deviation discount to KNM’s 5-year historical average PER. In addition to that, the outlook of the company is improving slightly with the construction of the Peterborough Green Energy Project in the UK.

INVESTMENT HIGHLIGHTS

• KNM Group’s 1QFY18 reported losses narrowed

• Normalised losses at –RM5.9m

• Contribution from bio-ethanol plant in Thailand seen

• Recurring income from power asset to gain traction

• EBITDA positive on key geographic segments

• Upgrade to TRADING BUY with a unchanged TP of RM0.22 Earnings support from bio-ethanol plant. KNM’s reported earnings of –RM18.4m is still under strain from: (i) high finance costs and; (ii) tough overseas operations. Excluding unrealised forex and derivative losses, KNM’s normalised losses amounted to only – RM5.9m. Revenue increase year-over-year by +3.4% supported by the bio-ethanol plant in Thailand that began operation in September 2017.

Asia & Oceania. Segment revenue increased +22.6%yoy largely attributable to the sales of bio-ethanol plant in Thailand. Segment EBITDA however dipped due to high unrealised foreign exchange losses.

Europe and Americas. Revenue and EBITDA from Europe is holding up but the condition in the Americas is still difficult.

Impact on earnings. As the EBITDA is still promising, we are maintaining our earnings estimates at this juncture.

Upgrade to TRADING BUY. Given the narrowing losses, lower operating expenses, upbeat global crude oil prices and traction achieved from its bio-ethanol plant, we believe that KNM is poised to perform better this financial year. As such, we are upgrading KNM to

TRADING BUY with and unchanged TP of RM0.22 per share. Our valuation is based on EPS18 of 1.3sen pegged to PER18 multiple of 17x. Our target PER is derived from a 0.25-standard deviation discount to KNM’s 5-year historical average PER. In addition to that, the outlook of the company is improving slightly with the construction of the Peterborough Green Energy Project in the UK.

Source: MIDF Research - 24 May 2018