KNM Group- HOLD - 18 Sep 2009

KNM Group- Verwater tie-up; precursor of benefits to come (Company Update)

Price: RM0.805
Target Price: RM0.72
Recommendation: HOLD

KNM’s fully owned subsidiary - KNM International S/B announced a 50% stake acquisition in Verwater Industrial Services S/B for RM100.
The still dormant company’s principal activities include the business of relocating and jacking of tanks, catalyst change-out and chemical cleaning works. It is owned by the founder of Verwater Group of companies, Mr Verwater Paul Antonius. The group was awarded, in June this year, an RM1.1b (EUR220m) contract by Lenstar Investment Ltd, to construct a 1,000,000m3 storage terminal in Kedah. The tank farm will be used by the Malaysian company Pristine Oil for the storage of crude oil. Construction has yet to be begin, but all necessary permits and land (100ha) to start-up the built up has been secured

· Potential contracts to be awarded post tie-up. We were impressed by management, of potential contract awards for the fabrication of process equipment in the tank farm, within the year. Their tentative valuation of the project of at least RM500m would bolster current order book standing to RM3.3b (previously RM2.8b) but will not change its tender book as the project had not been part of the RM14b previously quoted. Based on our sensitivity analysis, assuming the project, at 15% net profit margin commences in FY10 and it takes 2 years to complete, FY10 EPS will accrete by 0.9sen (7.9x – 8.8x). However, we hold off on changing our estimates pending actual awards of the contract, which is likely to be end of this year.

· Results for Gorgon tender earliest by 1HFY10. At present, Oceania accounts for 17% of their tender book, coming to some RM2.4b worth of projects which would have included the above. We are maintaining our 15% strike rate assumption on the RM14b tender book as such we make no change to earnings in regards to the project. But active news flow of Gorgon project is positive.

· Chad deal still on pause. No approval from their Chadian counterparty for the bid of extension as yet. Management has stated they are treading carefully and efforts are to ensure all ground will be covered, given the significant risks involved. They have extended the finalisation of the salient terms of the project to 30 November 2009.

· Maintain hold and target price at RM0.72. We are positive both on the present news and the Gorgon project as risk of contract replenishment slowly ebbs.