JPMorgan KNM Overweight 03/17

Highlighting FY09E post-Borsig potential (Lucius Chong)

Consensus should gravitate closer at the high-end. Due to the material significance of the Borsig acquisition, consensus forecasts have been thrown into disarray given that KNM is absorbing a company of almost equal size in terms of profitability and growth. Integration benefits and x-factors such as commanding as much as 60-70% of the global market share in process heat exchanges and being 1 of only 3 main players in the world offering membrane technology potentially bring a lot of upside risk to the post KNM-Borsiq picture.

Our numbers illustrate full intergration potential. Working through our key assumptions in this note and the material improvement in capacity and ASPs that Borsig and other previous M&A transactions like Ellimetal, we highlight that our top-of-consensus estimate for FY09E look achievable. The key guidance is that Borsig should increase group capacity by at least 11% and ASPs by 20%. Putting this key driver together with other factors like Ellimetal and the 15,000MT of additional take-or-pay contracts and the review of the current M$140MM expansion capex, the target assumption of 220,000MT capacity, M$20,000 for ASP and the 21% net margin does not look like a stretch.

Our M$9.70 Dec-08 PT is based on a target 17x FY09E PER based on the ex-rights price of M$5.08. Risk to our PT is the inability to execute the take-or-pay contracts which would cut our FY09E forecast by 7%. Meanwhile we are upgrading our FY08E EPS by 11% to reflect a half year impact of the Borsiq deal. We previously did not adjust for this due to the issue of recognition of goodwill. There will be no goodwill recognized due to the adoption of IFRS impairment testing.