HLG: KNM Group - Record profit in Q208; BUY (27 August 2008)

KNM Group BUY



Price target RM2.40



Share price at 26 Aug RM1.61



Investment summary


H108 net profit (+100% yoy) was 33-35% of HLG/consensus full-year forecast. KNM is on-track to meet our full-year forecast as our forecast includes RM150m contribution from Borsig in H208. The strong results reaffirm our BUY rating on the stock. We are bullish on KNM: (1) we see strong incremental EPS growth in H208, mainly due to consolidation of Borsig results. Q308 earnings could be up by 60-70% qoq; (2) valuation at 9x FY09 PE is 25-30% discount to global peers.

We are positive on the O&G fabrication business: (1) oil majors are increasing their capex

spending on onshore and offshore facilities to boost output given the high crude oil prices (2) lack of yard space and credible process equipment fabricators has created a super-normal pricing power for equipment makers like KNM.



Record high profits

Q208 results grew 100% yoy, mainly due to higher orders, capacity expansion and partial consolidation of Borsig. Share price remains attractive at 9x FY09E PE, 25-30% discount to global peers. We are buyers of KNM at current level.