Stock Name: KNM
Company Name: KNM GROUP BHD
KNM Group Bhd
(Aug 23, RM1.44)
Downgrade to hold at RM1.48 with revised target price of RM1.35 (from RM2.10): KNM reported 2QFY11 net profit of RM10.9 million (-43% quarter-on-quarter [q-o-q], -23% year-on-year [y-o-y]), the lowest since 4QFY09 losses, disappointing our already low expectations. This was despite higher revenue, growing 32% q-o-q and 42% y-o-y to RM544 million which implies slow margin recovery, possibly due to poor execution. Earnings before interest and tax (Ebit) margins have been dropping over the last few quarters, to 2.7% in 2QFY11 (4.1% in 1QFY11, 5.3% in 4QFY10). We suspect margins may take longer to normalise and recover to decent 2007/08 levels of 18% to 20%.
While KNM's outstanding order book is still hovering at RM5.5 billion, the company seems unlikely to translate it into strong earnings recovery in FY11, judging by its poor 2QFY11 results. But its RM3.3 billion order book, excluding the RM2.2 billion Peterborough project, may still provide earnings visibility in FY12. Net gearing remained healthy at 30% in June this year.
We revise down FY11 to FY13F earnings by between 23% and 34% after imputing higher operating expenses on the back of slow margin recovery. Likewise, we trim our target price to RM1.35, pegged to 10 times FY12 earnings per share, similar to the sector average. We downgrade KNM to 'hold' following the earnings and target price cuts.
A potential catalyst for the stock would be normalisation of project margins, which have severely eroded its profitability despite a relatively strong outstanding order book. ' HwangDBS Vickers Research, Aug 23
This article appeared in The Edge Financial Daily, August 24, 2011.
Company Name: KNM GROUP BHD
| Research House: HWANGDBS | Price Call: HOLD | Target Price: 1.35 |
KNM Group Bhd
(Aug 23, RM1.44)
Downgrade to hold at RM1.48 with revised target price of RM1.35 (from RM2.10): KNM reported 2QFY11 net profit of RM10.9 million (-43% quarter-on-quarter [q-o-q], -23% year-on-year [y-o-y]), the lowest since 4QFY09 losses, disappointing our already low expectations. This was despite higher revenue, growing 32% q-o-q and 42% y-o-y to RM544 million which implies slow margin recovery, possibly due to poor execution. Earnings before interest and tax (Ebit) margins have been dropping over the last few quarters, to 2.7% in 2QFY11 (4.1% in 1QFY11, 5.3% in 4QFY10). We suspect margins may take longer to normalise and recover to decent 2007/08 levels of 18% to 20%.
While KNM's outstanding order book is still hovering at RM5.5 billion, the company seems unlikely to translate it into strong earnings recovery in FY11, judging by its poor 2QFY11 results. But its RM3.3 billion order book, excluding the RM2.2 billion Peterborough project, may still provide earnings visibility in FY12. Net gearing remained healthy at 30% in June this year.
We revise down FY11 to FY13F earnings by between 23% and 34% after imputing higher operating expenses on the back of slow margin recovery. Likewise, we trim our target price to RM1.35, pegged to 10 times FY12 earnings per share, similar to the sector average. We downgrade KNM to 'hold' following the earnings and target price cuts.
A potential catalyst for the stock would be normalisation of project margins, which have severely eroded its profitability despite a relatively strong outstanding order book. ' HwangDBS Vickers Research, Aug 23
This article appeared in The Edge Financial Daily, August 24, 2011.
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