INVESTMENT HIGHLIGHTS

• KNM Group’s 4QFY17 reported earnings slipped into the red at –RM46.2m

• Fourth quarter losses after three promising quarters of profitability

• Registered EBITDA of RM118.4m compared with LBITDA of -RM181.3m in 4QFY16

• Maintain NEUTRAL with a unchanged TP of RM0.22

Earnings slipped into the red. After three promising quarters, KNM’s 4QFY17 results slipped into the red at –RM46.2m. Despite the dismal results, the group’s FY17 EBITDA staged a massive rebound to RM118.4m from a FY16 LBTIDA of –RM181.3m. The company’s FY17 losses stands at –RM42.4m. The losses were also partly attributable to higher depreciation charges and operational costs related with the bioethanol plant in Thailand which commenced in September 2017.

Asia & Oceania. Segment revenue declined by -49.9%yoy to RM202.1m due to lower works recognition as projects related to Pengerang Integrated Petroleum Complex which is at its tail-end and nearing completion. However, the lower revenue was partially offset by higher contribution from the bio-ethanol plant.

Europe. The European front continues to perform, with revenue increasing to RM1.18b while EBITDA stood at RM117.9m. The commendable results were premised on lower operating costs.

Americas. Losses from the Americas are declining, in line with the decline in revenue.

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

Maintain NEUTRAL. We are maintaining our Neutral stance on KNM with an unchanged target price 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. 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 Feb 2018