The research house said KNM’s 1Q09 earnings were in line with its estimate and that of consensus. It had not changed FY09-11 earnings per share (EPS) forecast for KNM, pending an update with management, on expectations that order flows would improve in 2H09 due to lower volatility in crude oil prices.KNM’s 1Q09 net profit of RM98 million was an increase of 82% on-year (y-o-y) and 19% on preceding quarter (q-o-q) and represented 24% of HLG’s full-year estimate. HLG added that revenue rose 59% y-o-y to RM525 million due mainly to consolidation of Borsig’s revenue. On a q-o-q basis, however, the revenue declined 38% due to lower progress billings and lower new orders.
“On our estimate, excluding new orders secured since February 2009, outstanding order book stood at about RM3.4 billion. Based on current pace of progress billings, the backlog orders are sufficient to last another 20 months,” it said.As of March 31, KNM had RM931 million net debt, implying a net gearing of 0.5 times. Term loans secured for the acquisition of Borsig would be repaid in six equal instalments and the first two bullet repayment of RM120 million each would be due in Jul/Aug 2009 and Jan/Feb 2010. “We see little default risk given strong operating cash flow (1Q09: RM72 million) and minimal expansion capex in FY09,” it said.
“Assuming zero new orders for the rest of FY09, existing orders are sufficient to last up to mid-2010. We think job flows will improve in 2H09 due to lower volatility in crude oil prices. ”It raised its discounted cash flow-derived price target to RM1 from 75 sen, imputing higher cash margin to outstanding order book and future job wins, noting that KNM’s shares could re-rate as news flow normalised.
“Despite strong share price performance (+99% year-to-date), valuations remain compelling... We think the huge valuation gap to peers is unjustified given similar geographical footprint and position in the high-end process equipment segment,” it said.KNM climbed nine sen to close at 89.5 sen last Friday.