KNM (RM0.41) - SELL
No one-off impairment >>> Within expectations 
4Q08 results were well within our expectations but 14% below consensus estimates. Turnover increased by 14% q-o-q but net earnings fell 20%, hit by higher effective tax rate arising from overseas operations (due to lumpy invoices that were taxed at 30% in Germany). Note that, KNM has started consolidating Borsig’s contribution into its accounts since June 08. Based on our estimate, assuming Borsig is generating about RM20m/month of net profit based on management’s guidance, this implies that the profit from KNM’s existing business only rose by 5% y-o-y for FY08. Overall, including Borsig, full year turnover was
almost double but net earnings upped by only 79%. A 1.5 sen dividend (1 sen taxable + 0.5 sen tax exempt) was declared for the quarter.
4Q08 results were well within our expectations but 14% below consensus estimates. Turnover increased by 14% q-o-q but net earnings fell 20%, hit by higher effective tax rate arising from overseas operations (due to lumpy invoices that were taxed at 30% in Germany). Note that, KNM has started consolidating Borsig’s contribution into its accounts since June 08. Based on our estimate, assuming Borsig is generating about RM20m/month of net profit based on management’s guidance, this implies that the profit from KNM’s existing business only rose by 5% y-o-y for FY08. Overall, including Borsig, full year turnover wasalmost double but net earnings upped by only 79%. A 1.5 sen dividend (1 sen taxable + 0.5 sen tax exempt) was declared for the quarter.
Warnings for amortisation
KNM has completed its fair value valuation by auditors in Germany and there was no write off on goodwill for Borsig. Instead, the RM1.7bn goodwill has now been reclassified to Intangible Assets of RM872.7m (total fair value for technology, brand & marketing) plus Goodwill of RM925.8m (goodwill arising from the acquisition of Borsig. Hence, a RM35m (for 7 months FY08) amortisation charges on Intangible Assets was incurred in 4Q08 result. We revise down our FY09-FY10 earnings projections accordingly to reflect the
amortisation expense of RM80m for full year (assuming 10% amortisation for intangible assets).
KNM has completed its fair value valuation by auditors in Germany and there was no write off on goodwill for Borsig. Instead, the RM1.7bn goodwill has now been reclassified to Intangible Assets of RM872.7m (total fair value for technology, brand & marketing) plus Goodwill of RM925.8m (goodwill arising from the acquisition of Borsig. Hence, a RM35m (for 7 months FY08) amortisation charges on Intangible Assets was incurred in 4Q08 result. We revise down our FY09-FY10 earnings projections accordingly to reflect the
amortisation expense of RM80m for full year (assuming 10% amortisation for intangible assets).
Minimal capacity expansion for the next 2 years
Over the next 2 years, we think KNM is unlikely to embark on any acquisitions, but would rather form partnerships with industry players. Given the low oil price and hefty cut in capex by international oil majors, it is reasonable for KNM to do so and meantime to digest its largest ever acquisition – Borsig. To recall, KNM as aborted its acquisition of Ellimetal in Belgium due to the tough operating environment. KNM has also announced at its 3Q briefing that its capacity expansion plan for its plant in Canada has been suspended as many oil sands projects are being reviewed by clients following the slump in oil price.
Over the next 2 years, we think KNM is unlikely to embark on any acquisitions, but would rather form partnerships with industry players. Given the low oil price and hefty cut in capex by international oil majors, it is reasonable for KNM to do so and meantime to digest its largest ever acquisition – Borsig. To recall, KNM as aborted its acquisition of Ellimetal in Belgium due to the tough operating environment. KNM has also announced at its 3Q briefing that its capacity expansion plan for its plant in Canada has been suspended as many oil sands projects are being reviewed by clients following the slump in oil price.
Downgrade with a lower TP of RM0.36
We downgrade our recommendation to Reduce (from Trading Buy) with a lower TP of RM0.36, based on a lower 3.5x FY09 PE (about 30% discount to sector’s PE). Our downgrade stems from: (i) higher amortisation expense; (ii) higher net debt (net gearing of 0.5)x; (iii) NTA of only 1sen; (iv) operating cash flows that did
not commensurate with higher net profits; and (v) higher effective tax rate. Current orderbook of some RM4bn would last for 1 year. Given the current level of oil price, we are not optimistic on the outlook for orderbook replenishment. Earnings & Valuation Summary FYE Dec (RMm) 2007
We downgrade our recommendation to Reduce (from Trading Buy) with a lower TP of RM0.36, based on a lower 3.5x FY09 PE (about 30% discount to sector’s PE). Our downgrade stems from: (i) higher amortisation expense; (ii) higher net debt (net gearing of 0.5)x; (iii) NTA of only 1sen; (iv) operating cash flows that did
not commensurate with higher net profits; and (v) higher effective tax rate. Current orderbook of some RM4bn would last for 1 year. Given the current level of oil price, we are not optimistic on the outlook for orderbook replenishment. Earnings & Valuation Summary FYE Dec (RMm) 2007
Construction & Infrastructure
MRCB (RM0.845) - BUY
Way below expectations, more provisions :
Losses again in 4QFY08
MRCB chalked up a higher net loss of RM39.3m in 4QFY08 as a result of provisions for remedial works and writedowns of land and unsold property inventories (around RM26m), surprised provision of around RM9m for the Sabah East-West transmission project which was completed in FY07 as well as lower property development bookings. The group suffered a net loss of RM26.8m in 3QFY08 due to provision for doubtful debts, writedown of goodwill, impact of construction cost escalation as well as sharply lower property development profit. 12MFY08 net loss of RM56.6m vs net profit of RM40.7m in 12MFY07
As a result of the heavy losses in 3QFY08 and 4QFY08, the group reported a net loss of RM56.6m in
As a result of the heavy losses in 3QFY08 and 4QFY08, the group reported a net loss of RM56.6m in
12MFY08 versus a net profit of RM40.7m in 12MFY07.
The net loss in 12MFY08 was in spite of the gains from redemption of non-cumulative preference shares in an associate and subsidiary (RM16.1m), and gains on disposal of an associate and subsidiary (RM15.9m). As in the past, no dividend has been declared.
Below expectations, cutting FY09-10 forecasts, introducing FY11 forecasts
The FY08 net loss of RM56.6m is way below our forecast of RM0.04m and consensus of RM52.3m. Variation to our FY08 forecast is attributable to our assumption of lower cost of building materials leading to some recovery in E&C margin, lower-than-expected property development profit as well as the surprised
provision and writedowns in 4QFY08. In view of the poorer performance in FY08 and current sharp economic slowdown, we are cutting our E&C and property development bookings and profit contributions – leading to cuts of 75.3% and 57.5% in our FY09 and FY10 net profit forecasts. We have not taken into
account any potential writeback of the provisions for the Sabah East-West transmission project as well as earlier E&C provisions (around RM23m) which the group will make VOP claims. We are introducing our FY11 forecasts, which assume revenues of RM500m for E&C, RM150m for property development and
RM150m for infrastructure.
Below expectations, cutting FY09-10 forecasts, introducing FY11 forecasts
The FY08 net loss of RM56.6m is way below our forecast of RM0.04m and consensus of RM52.3m. Variation to our FY08 forecast is attributable to our assumption of lower cost of building materials leading to some recovery in E&C margin, lower-than-expected property development profit as well as the surprised
provision and writedowns in 4QFY08. In view of the poorer performance in FY08 and current sharp economic slowdown, we are cutting our E&C and property development bookings and profit contributions – leading to cuts of 75.3% and 57.5% in our FY09 and FY10 net profit forecasts. We have not taken into
account any potential writeback of the provisions for the Sabah East-West transmission project as well as earlier E&C provisions (around RM23m) which the group will make VOP claims. We are introducing our FY11 forecasts, which assume revenues of RM500m for E&C, RM150m for property development and
RM150m for infrastructure.
BUY maintained on RNAV and likely positive impact of second stimulusBased on the 4QFY08 net debt of RM534.9m, property RNAV and target price is adjusted lower to RM1.33, which is 55% of the RNAV of RM2.43 for the group. BUY is maintained as we continue to expect share price to reflect the true value of its assets, especially KL Sentral, when markets stabilise. The group is also expected to benefit from the second stimulus package to be announced on 10 March. Outstanding order book end-08 was around RM1.8bn.
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