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Spotlight on KNM (7164) KNM GROUP BHD

Potential turnaround: A file picture showing Tan (left) and Lee during a press conference. Analysts say funds are looking for a turnaround under the stewardship of Tan.

INTERESTING things are brewing at KNM Group Bhd, which probably explains why the stock has been heavily traded recently.

On Wednesday, the total volume done was 322.41 million shares, making it the most active stock of the day.

The stock continued to be actively traded the following two days, to close at 28.5 sen yesterday. It has risen by some 60% in the past one month, giving the stock a market cap of RM947mil.

While founder and former group CEO Lee Swee Eng has been paring down his stake, the stock seems to have attracted interest from a number of investors including one or two institutions, dealers say.

They say these funds could be betting on a potential turnaround story under the stewardship of Terence Tan Koon Ping, who was appointed as group chief executive officer on July 9, 2020.

One investor has turned out to be MAA Group Bhd.

KNM's ethonal plant in ThailandKNM's ethonal plant in Thailand

MAA, which is involved in investment holdings and the insurance business, revealed that it has acquired a 7.01% stake in KNM from the open market at an average price of 22.7 sen per share or for a total of RM52.89mil. MAA said the purchase was made with internally generated funds and represented a good opportunity to buy at a low price relative to KNM’s net assets per share of 53 sen.

On Lee’s end, he had left his long-held CEO position effective July 9 last year when the reins were handed to Tan. He also relinquished his position as board member of KNM.His spouse Gan Siew Liat, who was designated as vice-chairman of the company when Lee retired, resigned in late June this year to pursue personal interest.

An Aug 25 filing with Bursa Malaysia showed that the businessman sold a total of 66 million shares – held directly and indirectly – via a direct business transaction.

That brought Lee’s direct interest to 2.383%, while his deemed interest stood at 5.525%.

Before this, company filings on June 22 showed that Lee and Gan via Inter Merger Sdn Bhd jointly undertook off-market and open-market transactions of 36 million shares. But on that day too, Gan exercised the company’s share option and raised her direct holding by an additional 10 million shares.

KNM Group logoKNM Group logo

Based on the company’s 2020 annual report, Lee and Gan directly held 3.34% and 1.19% respectively in the company as at April 22, 2020. Their private vehicle, Inter Merger, held 8.52%.

It is unclear why Lee has stepped down and been selling down in the company he founded, which at its height in 2007 had a market cap of about RM8bil.

KNM is now led by a new management that includes Flavio Porro, who is also the co-managing director of the Borsig group.

According to sources, under the stewardship of Tan, who was formerly the chief financial officer, KNM is undergoing a change which could see it divest part or all of one of its prized assets, namely Borsig GmbH.

Borsig is KNM’s German-based indirect wholly-owned subsidiary involved in process equipment manufacturing.

KNM bought the company and its group of companies back in 2008 for RM1.7bil.

The acquisition gave it a strong presence in Europe and the Middle East.

Any move to unlock value at Borsig would not be new for KNM.

It was first talked about in 2019 when Lee said the group was looking at monetising its investment in Borsig and was considering getting a strategic partner to take up a stake besides an initial public offering.

Lee, in a Nov 2019 media interview, had said that Borsig had been profitable all those years while the group’s other businesses were bleeding.

KNM operates its business, through three geographical segments Asia and Oceania, America and Europe, where it generates significant revenues for the group.

Financially, KNM returned to the black in the last two financial years as it continued to carry out a rationalisation strategy that began in 2017, which included monetising non-core businesses and exiting non-profitable markets.For the six months ended June 30, 2021, the group posted a lower revenue of RM477.21mil as against RM669.59mil in the same period a year ago, due to slow replenishment of orders from clients due to the impact of Covid-19.

In tandem with this, it achieved a lower gross profit of RM109.89mil versus RM132.39mil a year before.

In notes that accompanied its financial results, the group noted that gross profit margin continued to improve from 19.8% to 23.0% year-on-year due to effective cost management in process equipment fabrication projects. It said that general administration expenses was also down by 3.6% in the current financial period on the back of leaner operating outfits, but there were finance costs incurred for certain construction projects.

As at end-June, the group had short-term debt of RM711.8mil, while long-term borrowings stood at RM623.4mil.

On the other hand, it also had RM231.92mil in cash.

About three months ago, KNM’s proposed a private placement to raise RM167.9mil mainly to repay its bank borrowings, while RM44.08mil was to be earmarked for working capital purposes.

However, shareholders had rejected that plan at its EGM in late June.

Back to Borsig, sources say that KNM under Tan is now in talks with one of the parties that had previously negotiated with the company in 2019 for the Borsig asset.

If it is successful in monetising its investment in Borsig, part of the money could be used to bring down borrowings and raise the working capital that it had planned, they say.

KNM declined to comment to queries from StarBizWeek. Besides Borsig, KNM’s other key subsidiaries include petrochemicals equipment supplier FBM Hudson Italiana SpA.

It has also diversified into the renewable energy (RE) business to provide a stable income base.

In this space, its bioethanol plant in Thailand started operations in July 2017, producing 200,000 litres of bioethanol per day using tapioca as feedstock.

It plans to up the capacity at this facility to 500,000 litres per day.

The second RE venture is the Peterborough project in the United Kingdom, which has a total expected capacity of 80MW.

Phase one of this waste-to-energy plant, according to reports, is scheduled for completion by mid-2022.

Considering the assets under its stable, it is no wonder that investors such as MAA deemed KNM to be an undervalued stock. However, it is left to be seen how well the company’s management can extract value from these assets and reduce its burdensome debt levels.

https://www.thestar.com.my/business/business-news/2021/09/04/spotlight-on-knm

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