KNM Group Berhad BUY

Price target RM0.75

Share price at 24 Apr RM0.575
Investment summary
Key takeaways from our recent company visit:

(1) Deferred projects and re-tendering of bids is expected to crystallize in 2H09 as volatility in crude oil prices decreases.

(2) On the flip side, margins for mid/low end products is at risk due to higher competition but margins for high-end segment (mainly from Borsig) are expected to hold firm.

(3) Existing cash and strong FY09 FCF should be sufficient to repay RM132m debt due in FY09 which will see net gearing fall to 30% by end-09 (vs. 50% in FY08).

(4) Foreign shareholding has declined to <30% in Dec08 vs. a high of 40%.

We maintain our BUY rating on the stock with a higher price target of RM0.75/share based on DCF, valuing the stock at 7.8x FY09 PE: (1) We see upside potential as order book replenishment increases in 2H09. (2) Based on our revised FY09 EPS estimate, current share price is valued at 6.0x PE and 5.2x EV/EBITDA, 31% and 15% discount to global peers’ PE and EV/EBITDA.

Cheap O&G exposure
On flat yoy growth, PE and EV/EBITDA valuation look compelling at 6x and 5x vs. global peers’ 9x and 6x. Concerns over further M&A, job cancellations and stock selldown have abated. Stock price will rerate on orderbook replenishment in 2H09.