Hold (from Sell)
Share price: MYR0.395
Target price: MYR0.40 (from MYR0.23)
Above Expectations; Upgrade to HOLD
TP raised to MYR0.40. 1H13 results were above our expectations at 67%/136% of our full-year pre-tax/core net profit estimates, compelling us to raise our 2013/14 earnings forecasts by 192%/39%. We also raise our TP 74% on a higher 2014 PER of 10x (8x previously) as most of the negatives are priced in, we believe. While order book replenishment and margin visibility remain low, the stock’s downside risk is limited following a 32% fall in the share price since our downgrade in August. We thus upgrade the stock to HOLD from SELL.
Results ahead of expectations. While revenue fell 12% QoQ to MYR430m in 2Q13 on slower job recognition, pre-tax profit and core net profit jumped 131% and 352% QoQ to MYR7m and MYR12m. The underlying QoQ growth of in pre-tax profit was supported by a higher group EBITDA margin (+2.1ppts to 9.9%) on improved product mix. The significant jump in net profit was aided by a MYR4m tax credit due to the reversal of tax provisions in a foreign subsidiary.
Raising 2013/14 earnings forecasts. The increase in earnings forecasts is largely due to lower taxes and higher operating margins. We now expect KNM to deliver higher net profit of MYR33m/MYR62m in 2013/14. While we take comfort in the improved 2Q13 results, we remain cautious on the sustained operating recovery, considering that previous quarterly results were volatile and inconsistent. We understand that order backlog is at a sustained MYR1.6-1.8b level.
Upgrade to HOLD. Most of the negatives are priced in. The share price is unlikely to gain traction until it shows a sustained recovery in earnings over a few quarters. On the corporate front, we gather that the proposed listing of Borsig (its core division based in Germany) in the SGX has been delayed and is unlikely to meet the 2014 deadline.
Publish date: 29/08/13