KNM  Group  (KNM)  announced  yesterday  that  its  wholly-owned subsidiary, KNM Project Services, has disposed of its entire 80% stake in Energy Park Investments for GBP800. While this does not mean that KNM  will  abort  its  UK  waste-to-energy  project  in  Peterborough,  we downgrade our call  on the stock to SELL  given the uncertainties ahead. Accordingly, we cut our TP cut to MYR0.42 from MYR0.59.

- An  unexpected  development. In  its  announcement,  KNM  stated  that the rationale to dispose of its 80% stake in Energy Park Investments was to explore an alternative corporate structure as well as funding options for the  proposed  development  of  the  80MW  waste-to-energy  plant  in Peterborough, England. 

-  Possible  delays  in  Peterborough  project. While  the  announcement does not mean that KNM will  abort the  Peterborough project,  we believe there  could  be  potential  delays  as  funding  would  likely  be  an  issue . KNM’s balance sheet will be stretched if it was to undertake the project. As  at  end-1QFY13,  the  group  had  a net  gearing  ratio  of  0.41x  but  this could rise  significantly  to 1.03x  should KNM proceed with Phase 1 of the project,  assuming  a  80:20  debt  and  equity  financing  as  guided  by Management.   

- Lowering  our estimates.  Given  the number of uncertainties  facing  the company, including:  i) the continuity of the Peterborough project,  ii) weak prospects  for  its  orderbook  replenishment,  and  iii)  weak  operational capabilities to execute its projects, we lower our FY13 and FY14 revenue forecasts  by  15.4%  and  15.5%  respectively.  Consequently,  we  reduce our earnings projections by 24.8% for FY13 and 20.1% for FY14.

- Downgrade  to  SELL.  In  line  with  our  lower  earnings  projections,  we downgrade  the  stock  to  a  SELL  from  NEUTRAL.  Our  fair  value  is reduced  to  MYR0.42  from  MYR0.59  previously,  following  our  earnings downgrade  and pegged to  a lower P/E of 9x (10x  previously) of its 12-month forward earnings. At MYR0.42, it is at 1.1x of its P/NTA, which we think is justifiable.

Source: RHB