KNM Group -Poised for new tank terminal job from Kedah

Share price: RM0.805
Fair value: RM0.80
Call: HOLD (unchanged)

* KNM Group Bhd (KNM) appears poised to secure contracts up to RM500mil in Kedah from its joint-venture vehicle- Verwater Industrial Services (Malaysia) Sdn Bhd (VISM). KNM subscribed for a 50% equity stake in VISM for a token sum of RM100.

* Currently, VISM is privately owned by Verwater Paul Antonius - owner of Verwater Group of Companies based in the Netherlands. The Verwater Group are specialists in storage tanks and terminals design, construction and maintenance for almost 90 years in the Netherlands, Belgium, France, Singapore and Nigeria.
* In June this year, the Verwater Group signed a contract with UK-based Lenstar Investment Ltd to build an oil storage terminal in Yan, Kedah with a storage capacity of 1 million cu metre costing 220 million euro (RM1.1bil). We understand that Verwater could award contracts up to 180 million euro to VISM of which, KNM could secure 50%.

* In April this year, Lenstar signed a memorandum of understanding with Pristine Oil (M) Sdn Bhd to build storage tanks for holding up to 1.5 million barrels of oil and a 22km pipeline from Gurun to Yan, plus an 18km offshore pipeline to facilitate uploading of oil from vessels to tanks. Lenstar holds an 85% stake in the joint venture with Pristine. Newspaper reports claim that Lenstar has already purchased a 100ha piece of land and obtained the necessary permits to build the new tank farm and the pipelines.

* We understand that Verwater's project involves the US$10bil refinery project being proposed by Merapoh Resources Corp Sdn Bhd (Merapoh). In July this year, Merapoh and the Kedah state government signed a memorandum of agreement to revive the development of a refinery in Yan, Kedah. Project comprises development of a two-train refinery in the Sungai Limau Hydrocarbon Hub with a total capacity of 350,000 barrels per day.

* The Merapoh project - which is planned to be built over five years together with a 20 km pipeline going towards offshore Kedah for offloading of crude oil and loading of refined oil - involves reclamation of offshore land totalling 340 hectares and the use of 40 hectares on-shore land and building.

* We are sceptical of the viability of these projects due to: (1) Lack of an established track record from the local promoters of the project; (2) Potential delays in land acquisition for both pipeline and refinery projects as the states involved are controlled byopposition parties; (3) Absence of Petronas's participation, which could have lowered execution and financing risks; and (4) technical difficulties involving different grades of crude oil.

* If KNM secures the Verwater project, we estimate that the group's outstanding order book could rise from RM2.4bil to RM2.9bil- translating to 1.2x FY09F revenues. We maintain our FY09F-11F for now pending further clarification from management. As the stock currently trades at a fully valued FY10F PE of 11x vis-a-vis the oil & gas industry's 10x, we reiterate our HOLD call.