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.

KNM Group: New orders recovery in sight - BUY

KNM Group
KNMG MK, BUY, CP 0.82, TP 1.05, Mkt cap: 884m, ADV: 11.7m


* KNM's 1Q09 results will likely be weak due to seasonality and low-rate
of new contract wins in the past six months.

* Rate of new contract wins to pick-up pace in 2H09, following the
re-tender process in 1Q09 and better oil prices.

* Maintain BUY. TP raised to MYR1.05, based on 10x P/E. Global peers
valuation has nearly doubled in the last 3 months.


2009E: P/E 7.5, P/B 1.4, ROE 20.6, Yld 1.9
2010E: P/E 8.8, P/B 1.3, ROE 15.1, Yld 1.9

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.

KNM Group Bhd: Rerating in Process

· Assuming coverage with OW: We reiterate our Overweight rating on KNM given its global presence and strong branding, not only in the oil & gas sector but also in petrochemicals as well as minerals.

· Moving up the value chain with Borsig: Borsig is a Germany-based company specializing in critical high-temperature and high-pressure components. Post the completion of the acquisition of Borsig, KNM Group has now leadership position in various high-end/specialized products; hence allowing it to report gross profit margins in the range of 25-30%, up from the historical level of ~20%, in our view.

· Cautiously positive outlook on oil prices: The J.P. Morgan Commodities team is expecting oil prices to reach US$55/barrel and an average US$49/barrel in 2009. At US$50-55/barrel, conventional oil projects are feasible. Note that, conventional oil projects are feasible at US$30-40/barrel, while most deepwater projects should be viable at US$50-60/barrel.

· Primed for a re-rating as risk aversion moderates: We believe that the stock will outperform, driven by moderating risk aversion. The share price has fallen 77% from its peak and the stock is now trading at 5x FY09E earnings, which we believe is already reflecting trough earnings. Our FY09 earnings estimate of M$390MM is based on a revenue assumption of M$3B vs. full capacity of M$4B. Foreign shareholding has also fallen from its peak of 40% to sub-30%.

· Our Dec-09 PT is M$1.00: Our PT is based on a FY09E P/E of 10x, in line with its 5-year average P/E. As risk aversion moderates, we expect valuations to revert back to mean. We also fine tune our estimates (cut our FY09E NP by 41% and FY10E by 56%) as we were restricted on this stock for the past six months.

KNM Group: Oil sands contracts cancelled - BUY

KNM Group: Oil sands contracts cancelled - BUY - Foong Choong
Chen

KNM Group (KNMG MK) - BUY
Price 0.42, TP 1.18, Mkt cap $456m, Avg t/o $8.3m

Oil sands contracts cancelled

* MYR80m oil sands contracts cancelled. Balance MYR140m under review. No
cancellations on non-oil sands jobs.

* Sentiment likely to be negative. Company may also reduce earnings
guidance at analyst briefing later this month.

* Maintain BUY. Longer term positive, as risk of slowdown
appears priced-in.

2008E: Rec EPS 0.11, P/E 3.8, P/B 0.8, ROE 32.7, Yld 4.8

2009E: Rec EPS 0.15, P/E 2.8, P/B 0.7, ROE 26.5, Yld 6.0

2010E: Rec EPS 0.18, P/E 2.4, P/B 0.6, ROE 25.5, Yld 8.3


Foong Choong Chen
BNP Paribas Capital (Malaysia) Sdn. Bhd.
(60 3) 2050 9938

KNM - HOLD - 28 May 2008

KNM Group - 1QFY08 results within expectations (Results Note)



Price: RM6.35

Target Price: RM6.80

Recommendation: HOLD



· 1QFY08 net profit of RM54.1m was within expectations although at only 12% of our earnings estimate of RM454.2m and 13% of consensus estimate of RM427.4m. We expected 1QFY08 net profit to be similar to that of 4QFY07 of RM51.9m as its new acquired companies, Ellimetal, HZM and Borsig will only commence contributions from 3QFY08 onwards.

· Beneficiary of larger fabricating capacity. 1QFY08 net profit of RM54.1m was 41% higher YoY to due to its larger fabricating capacity (115,000MT in FY08 versus 77,500MT in FY07) facilitating the execution of more high margin job orders.

· Flattish QoQ growth expected. 1QFY08 pretax profit of RM61.4m was 6% lower QoQ due to higher interest expense of RM4.6m versus 4QFY07 interest expense of RM0.4m as total borrowings increased from RM265.2m to RM342.5m. 1QFY08 net profit of RM54.1m was 4% higher QoQ due to lower tax expense driven by utilisation of certain tax incentives.

· No revision in earnings estimates. As eluded in the first point, earnings contributions from Ellimetal (¡ÖRM10.0m), HZM (¡ÖRM10.0m) and Borsig (¡ÖRM130.0m) will only commence contributions from 3QFY08 onwards and should make up for the remaining 88% of our earnings estimate.

· Maintain RM6.80 target price based on 15x FY09E PER but revise call from BUY to HOLD as upside potential has been compressed to only 7%. We may review our call after attending its next analyst briefing. Management represents that its current order book remains strong at RM3.9b (Borsig - RM1.5b) and keep them busy for more than a year.





KENANGA INVESTMENT BANK BERHAD (15678-H)

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.

HDBSVR: KNM Group, Maintain Buy

KNM Group

Time to bottom-fish

-Story: KNM held an analyst briefing yesterday to provide more details on its recent acquisition of Borsig, HZM and Ellimetal. These acquisitions should be completed by mid-2008, and raises KNM's orderbook to RM3.9b. Borsig and Ellimetal offer significant synergies given their established brand names and strong foothold in Europe – they can offer a new customer base to KNM. Upon completion of the acquisitions, KNM will have 22 plants in 13 countries. Its organic growth coupled with new acquisitions will enhance FY08-09F capacity by 51% and 10%, respectively. Growing contribution from Europe will also enhance orderbook breakdown in Euro and US$ to 50:50, and help to cushion against forex risk arising from a weakening US$.

-Point: KNM is on track to move up the value chain by increasing sales of higher end products from Borsig and Ellimetal. It has targeted sales of higher end products to make up 45% of FY08F (FY07-30%) revenue. We raised our FY08-09F net profit forecast by 29% and 62%, respectively, after factoring in the increased capacity and higher average selling price of RM19,00/tonne after the completion of the acquisitions in 2Q08. There is potential upside to our forecasts as KNM plans to cross-sell mid and high end products, and shift part of Borsig and Ellemetal's production to its lower cost plants.

-Relevance: KNM's share price has fallen 19% since 4 Mar 2008 due to a weak equity market. We believe this is excessive as KNM's prospects remain promising with improving margins and strong FY08-10 EPS CAGR of 51%. Its fundamentals are intact, but we lowered our target price to RM7.60 per share based on 15x FY09 EPS (25x previously), to reflect average peers' PE and KNM's historical low PE valuation.

JPMorgan KNM Overweight 03/17

Highlighting FY09E post-Borsig potential (Lucius Chong)

Consensus should gravitate closer at the high-end. Due to the material significance of the Borsig acquisition, consensus forecasts have been thrown into disarray given that KNM is absorbing a company of almost equal size in terms of profitability and growth. Integration benefits and x-factors such as commanding as much as 60-70% of the global market share in process heat exchanges and being 1 of only 3 main players in the world offering membrane technology potentially bring a lot of upside risk to the post KNM-Borsiq picture.

Our numbers illustrate full intergration potential. Working through our key assumptions in this note and the material improvement in capacity and ASPs that Borsig and other previous M&A transactions like Ellimetal, we highlight that our top-of-consensus estimate for FY09E look achievable. The key guidance is that Borsig should increase group capacity by at least 11% and ASPs by 20%. Putting this key driver together with other factors like Ellimetal and the 15,000MT of additional take-or-pay contracts and the review of the current M$140MM expansion capex, the target assumption of 220,000MT capacity, M$20,000 for ASP and the 21% net margin does not look like a stretch.

Our M$9.70 Dec-08 PT is based on a target 17x FY09E PER based on the ex-rights price of M$5.08. Risk to our PT is the inability to execute the take-or-pay contracts which would cut our FY09E forecast by 7%. Meanwhile we are upgrading our FY08E EPS by 11% to reflect a half year impact of the Borsiq deal. We previously did not adjust for this due to the issue of recognition of goodwill. There will be no goodwill recognized due to the adoption of IFRS impairment testing.