INVESTMENT HIGHLIGHTS

• KNM Group’s (KNM) 2QFY18 reported losses of –RM33.6m

• Normalised losses -RM25.9m

• Earnings supported by new bio-ethanol plant in Thailand

• Diversification into renewable energy bearing fruit

• EBITDA positive on key geographic segments

• Maintain TRADING BUY with unchanged TP of RM0.22 per share

Earnings supported by bio-ethanol plant. KNM’s reported net loss of –RM33.6m in 2QFY18 due to: (i) unrealised losses on foreign exchange and; (ii) tough overseas operation during the quarter. Excluding unrealised losses on foreign exchange and derivative losses, KNM’s normalised losses amounted to -RM25.9m for the quarter. This brings its 6MFY18 losses to -RM31.9m. Revenue grew by +5.2% supported by the bio-ethanol plant in Thailand that began operation in September 2017.

Asia and Oceania. Segment revenue increased by +35.5%yoy largely attributable to the sales of bio-ethanol plant in Thailand. However, segment EBITDA dipped due to unrealised loss on forex, lower profit margins and slow replenishment of new orders in the current period.

Europe and Americas. Segment revenue and EBITDA showed signs of recovery with increased orders secure as well as higher revenue contribution with a higher profit margin. That said, the condition in America remains difficult despite the narrowing losses due to lower operating expenses.

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

Maintain TRADING BUY. Despite the losses, we are positive on the upbeat global crude price, lower operating expenses and the increasing contribution from its bio-ethanol plant in Thailand. Hence, we are maintaining our TRADING BUY stance on KNM with an unchanged target price of RM0.22 per share. Our TP is premised on PER18 of 17x pegged to EPS18 of 1.3sen. Our target PER is derived from a 0.25-standard deviation discount to KNM’s 5-year historical average PER. Additionally, the outlook of the company is improving slightly with the construction of the Peterborough Green Energy Project in the UK.

Source: MIDF Research - 3 Sept 2018