PETALING JAYA: Securing a RM2.2bil power plant project in Britain will boost KNM Group Bhd's order book to RM4.6bil, but the company will still have to address legacy issues in the next few years.
At an analysts' briefing recently, KNM said its poorer-than-expected performance in the fourth quarter of financial year (FY) 2009 was attributed mainly to provisioning for foreseeable losses in its operations in Brazil, Canada and Indonesia, coupled with a revaluation of the group's Canadian properties.
KNM incurred an unexpected loss of RM31mil in its fourth quarter ended Dec 31, 2009, which reduced its full year 2009 net profit to RM171mil, which was about half its previous year's RM336.4mil.
An analyst with K&N Kenanga Research said KNM had entered into several contracts in the past which had low profit margins and had to honour those contracts in an environment of low oil prices.
“Most of these contracts have either been delivered or are at the tail-end. As such, we are more optimistic of KNM's performance going foward, especially with oil prices at much higher levels,” he said.
The analyst conceded that despite an overall positive consensus on KNM, the company would suffer a legacy issue as a result of not delivering on its targetted performance.
A Maybank Research analyst said KNM's net profit forecast for FY10, FY11 and FY12 was expected to be RM168.2mil, RM232.4mil and RM305.5mil respectively, supported by the new power plant contract in Britain.
The RM2.2bil power plant project from Peterborough Renewable Energy Ltd (PREL) in Britain was secured by KNM via wholly owned subsidiary, KNM Process Systems Sdn Bhd.
“Delivering losses in past contracts secured is a legacy issue when oil prices were down.
“Since then, oil prices have gone up substantially and barring unforeseen circumstance, KNM should meet our net profit targets,” she said.
An analyst with AmResearch said the strong price performance was largely driven by local investors, as foreign shareholding had remained at 21% to 22% over the past few months versus 18% early this year and the peak of 40% in June 2008.
KNM's four-year engineering, procurement, construction and commissioning contract in Britain is to develop an 80MW gross capacity biomass and waste recycling centre known as EnergyPark Peterborough.
“This brings contracts secured year-to-date to RM4.4bil and order book size ballooning to RM4.6bil, which is an all-time high,” said an analyst from HwangDBS.
He said the company's earnings were expected to gain momentum next year with potential news flow from local jobs in the near term.
The analyst has a net profit forecast of RM170mil for FY10, RM184mil for FY11 and RM254mil for FY12.
“We expect the recovery in earnings to continue in the next few quarters as the company rides on higher capacity utilisation and better margin jobs secured, post 2009,” he said.
Going forward, the research house expects the domestic market to play a crucial role in KNM's recovery story.
“Near term, we see news flow to come from its latest joint venture which is targeting potential jobs in East Malaysia, with FY11 and FY12 earnings forecasts upgraded by 24% and 9% respectively to factor in higher contract wins in 2010 and better margins on new jobs secured,” he said.
“We believe the higher valuation on KNM is supported by positive sentiment on oil and gas companies, particularly on the rising number of domestic jobs,” he said, adding that KNM was also poised to benefit from growing global opportunities.
“KNM is currently trading at FY11 price-earnings ratio of 11.9 times against local and regional peer's average of 15.4 times and 18.6 times respectively,” he said.
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