HLG: 28 May 2008 KNM Group

HLG: 28 May 2008 KNM Group - Expect Borsig, Ellimetal boost in H208

KNM Group BUY



Price target RM7.30



Share price at 27 May RM6.35



Investment summary


Q108 net profit of RM54m was 53% below our forecast and 49% below consensus. The earnings are way below as we have imputed earnings accretion from Borsig deal as well as timing differences surrounding the fabrication yard expansion. We are keeping our BUY rating on KNM: (1) earnings accretion from Borsig and Ellimetal deals will provide the next leg-up in earnings in H208 (2) share price is attractively priced on a 12-month look ahead at 12x FY09E EPS (3) potential cross-selling synergies from Borsig, Ellimetal has not been factored-in. We think KNM stands to benefit from the record crude oil price above USD130/bbl as oil majors increase their capex spending.



Better H208 from M&A

Q108 net profit was below our full-year estimate as we have imputed the earnings accretion from M&A deals. Share price has declined 10% YTD but has outperformed the KLCI by 18% over the last 3 months. KNM looks attractively prices at 12x FY09E PE, assuming 96% earning growth pa.