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KNM_broker-call_fd130416_theedgemarketsKNM Group Bhd
(April 12, 49.5 sen)
Trading buy with fair value of 57 sen: Recall that we issued a report on process equipment manufacturer KNM Group Bhd in December last year, the company recorded a core net profit of RM82.3 million for financial year 2015 (FY15). The result was in line with our estimate, after stripping off deferred tax charge of RM55.8 million and a gain on disposal of subsidiaries amounting to RM19.9 million. We opine that the earnings performance was largely attributable to favourable currency movement given that KNM’s earnings before interest, taxes, depreciation and amortisation fell 2.3% to RM263.1 million last year.

We gathered that KNM recently secured €30 million (RM133.14 million) financing for the Peterborough project. The company is in the midst of taking a second financing through a £35 million (RM194.09 million) local loan at a higher interest rate of 6%. The construction of this waste-to-energy plant is likely to go full force in the second half of 2016 (2H16) and to be completed by the third quarter of 2017. Management is looking to generate full-year profit after tax and minority interest (Patami) of RM40 million from the first-phase capacity of 17.6mw and up to RM160 million of Patami upon full capacity of 80mw, which could take up to seven years to complete.

Once a commissioning date is secured, KNM would firm up the contracts with off-takers while ensuring no single client contributes lumpily to the bottom line. Assuming 85% utilisation of the 200,000 litres per day cassava-based bioethanol plant, it would generate approximately RM15 million for 12 months of operations. Should this project successfully take off, it would mark the maiden step for KNM to establish its recurring income business model.

To recap, KNM was on a contract winning streak securing more than RM1.2 billion worth of engineering, procurement and construction projects and process equipment supply projects in 2H15. We believe KNM’s earnings will pick up this year as these projects enter the fabrication and construction stage. While we are expecting more refinery and petrochemical-integrated development (Rapid) project-related jobs to be dished out, year to date, KNM has only managed to bag a RM57.8 million subcontract relating to civil and underground piping work from Sinopec through its 50%-owned joint venture company with Ho Hup Construction Co Bhd. We believe most contract awards from Rapid could happen in 2H16 and will lend support to FY17 earnings.

KNM’s total outstanding order book currently stands at RM2.8 billion, spanning the next three years. Management still aims to secure RM500 million worth of contract replenishment in each quarter. While we anticipate the Rapid project to experience a slight slowdown, overseas projects such as Al-Zour Refinery are keeping the management excited. This US$16 billion (RM62.24 billion) mega project, led by Kuwait National Petroleum Co, is set to raise Kuwait’s processing capacity by 615,000 barrels per day. KNM bagged its first US$25 million project at the beginning of the year and is expecting more to come. — Kenanga Research, April 12

KNM (7164) - KNM expecting more contract wins to come
http://www.theedgemarkets.com/my/article/knm-expecting-more-contract-wins-come
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