KNM Group Bhd
(Aug 1, RM1.83)
Maintain buy at RM1.82 with revised target price of RM2.68 (from RM3.20): We visited KNM’s management recently to get more clarification about the company’s potential engineering, procurement, construction and commissioning (EPCC) contracts and equity participation in the proposed RM17 billion Integrated Petroleum Complex (IPC) at Teluk Ramunia.
Management indicated that nothing has been confirmed and they are now awaiting Gulf Asian Petroleum Sdn Bhd (GAP), the project developer, to finalise the project details. This includes, for instance, the sources of crude oil supply for its refinery (which we believe will be secured from the Middle East).
We were told that GAP has already completed the front end engineering design (FEED) stage for the IPC. KNM’s management also guided that the potential EPCC contracts awarded directly to KNM might be worth about RM3 billion (instead of RM17 billion) as most of the jobs will then be outsourced to third parties.
Besides, other prospective income might be recurring in nature, generated from the oil storage facility and plant maintenance jobs.
Revenue recognition of the RM2.2 billion contract awarded by Peterborough Renewable Energy Ltd has been delayed further from the revised target of starting July 2011. We have revised our assumption for the contracts realisation date to 4QFY11. This project accounts for 40% of KNM’s outstanding order book, so we believe it is an important catalyst to re-rate KNM.
As we are still concerned over the viability and funding accessibility of the aforesaid IPC project, we have yet to factor in any profit contribution. We have cut our FY11 and FY12 earnings per share (EPS) by 33.8% and 16.2% to 12.6 sen and 19.1 sen after taking into account: (i) further delay in the Peterborough project; and (ii) lower FY11 and FY12 average gross margin assumption of 19% and 20% from 21% and 22% previously, given lower management guidance.
KNM’s 2QFY11 results will be released on Aug 22 and are expected to remain weak. Management expects earnings to recover only in 2HFY11.
Maintain “buy” with revised target price of RM2.68, based on 14 times revised 2012 EPS. We believe the company’s current outstanding order book of RM5.5 billion and the fact that margin tends to improve after clearing its lower-yield order backlog secured in 2009 and 1H10, might cushion further downside. We also expect buying interest in KNM to revive should the Peterborough project start contributing. Any positive news flow regarding the IPC is also a plus to KNM. — MIDF Research, Aug 1
This article appeared in The Edge Financial Daily, August 2, 2011.
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