KNM - HOLD - 28 May 2008

KNM Group - 1QFY08 results within expectations (Results Note)



Price: RM6.35

Target Price: RM6.80

Recommendation: HOLD



· 1QFY08 net profit of RM54.1m was within expectations although at only 12% of our earnings estimate of RM454.2m and 13% of consensus estimate of RM427.4m. We expected 1QFY08 net profit to be similar to that of 4QFY07 of RM51.9m as its new acquired companies, Ellimetal, HZM and Borsig will only commence contributions from 3QFY08 onwards.

· Beneficiary of larger fabricating capacity. 1QFY08 net profit of RM54.1m was 41% higher YoY to due to its larger fabricating capacity (115,000MT in FY08 versus 77,500MT in FY07) facilitating the execution of more high margin job orders.

· Flattish QoQ growth expected. 1QFY08 pretax profit of RM61.4m was 6% lower QoQ due to higher interest expense of RM4.6m versus 4QFY07 interest expense of RM0.4m as total borrowings increased from RM265.2m to RM342.5m. 1QFY08 net profit of RM54.1m was 4% higher QoQ due to lower tax expense driven by utilisation of certain tax incentives.

· No revision in earnings estimates. As eluded in the first point, earnings contributions from Ellimetal (¡ÖRM10.0m), HZM (¡ÖRM10.0m) and Borsig (¡ÖRM130.0m) will only commence contributions from 3QFY08 onwards and should make up for the remaining 88% of our earnings estimate.

· Maintain RM6.80 target price based on 15x FY09E PER but revise call from BUY to HOLD as upside potential has been compressed to only 7%. We may review our call after attending its next analyst briefing. Management represents that its current order book remains strong at RM3.9b (Borsig - RM1.5b) and keep them busy for more than a year.





KENANGA INVESTMENT BANK BERHAD (15678-H)