OSK keeps 'trading buy' on KNM Group

OSK keeps 'trading buy' on KNM Group

Date: 26/07/2011

Source	:	OSK
Stock	:	KNM		Price Target	:	2.80	|	Price Call	:	TRADING BUY
				Last Price	:	1.97	|	Upside/Downside	:	+0.83 (42.13%)

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OSK Research is maintaining its trading buy on KNM Group with the fair value remaining unchanged at RM2.80.

KNM is undertaking the refinery/polypropylene and storage projects at Teluk Ramunia, Johor, and the research house said this could be a potentially positive contribution to the existing orderbook.

"Currently, we believe KNM Group's orderbook is still above RM5 billion while the tenderbook is over RM17 billion," OSK Research said.

KNM announced yesterday that it and Zecon Bhd have entered into two agreements with Gulf Asian Petroleum SB (GAP)for the refinery/polypropylene and storageprojects at Teluk Ramunia, Johor.

The company said it would form a consortium with Zecon Bhd and Korean/Chinese contractors to undertake the engineering, procurement and construction (EPC) of the projects.

But more information is needed to gauge the financial impact on KNM, according to OSK Research.

"KNM will need to arrange a sukuk issuance of up to RM1.5 billion to cover the project financing during construction, while GAP will arrange a financial guarantee from a local investment fund of up to RM1.5 billion during the construction period, to be converted into a long-term loan thereafter and a facilitation fund of up to RM300 million," OSK Research said.

OSK Research believes KNM would have the financial muscle to take up the preliminary investment of RM240 million as its net gearing is still below 1x.

"Based on its 1QFY11 results, it had net debts of RM534.6 million with total debts of RM1 billion and cash equivalents of RM479.5 million. Hence, this also led to a net gearing of 0.3 times," OSK Research said.

Although these projects could potentially contribute positively to its FY12-15 earnings, OSK Research said it is keeping the FY12 forecast unchanged for now, pending more financial guidance from management.

"Also, due to past events, we harbour some doubts on whether the project will take off," it added.

Other than that, OSK Research believes that securing the project financing itself has some uncertainty given the huge sum needed. -- Bernama