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Borsig sale to unlock cashflow for  KNM 7164 KNM GROUP BERHAD

KNM Group Bhd’s proposed sale of German-based unit Borsig GmbH is expected to improve the group’s cash position and enhance its financial capability to undertake contracts for the fabrication of process equipment and renewable energy (RE) projects.

“The sale is a strategic opportunity to monetise our assets, to allow us to achieve our business plans and objectives,” group CEO and executive director Terence Tan tells StarBizWeek.

ALSO READ: Borsig sale to provide lifeline for KNM

Borsig and its subsidiaries are involved in the manufacturing of process equipment mainly used in the petrochemicals as well as oil and gas industries.

On May 24, 2022, KNM Group said its subsidiary Deutsche KNM GmbH (DKNM) has entered into an agreement with GPRSiebzigsteVerwaltungsgesellschaftmbH (GSV) for the proposed disposal of 100% equity interest in Borsig GmbH for €220.8mil (RM1bil).

The sale comes as no surprise as the cash-strapped group has been working towards the monetisation of Borsig and the proceeds will go towards addressing its financial constraints.

KNM Group is involved in project management, engineering, manufacturing and construction for the RE, power, utilities, refining and petrochemical industries.

ALSO READ: KNM to dispose of Borsig in RM1.03bil deal

It operates in eight countries and its customers are international refining, petrochemicals, energy and global engineering contractors.

“While Borsig has contributed positively to the financial performance of KNM Group over the years, KNM Group is undertaking the proposed disposal to provide a timely cash injection to improve its financial position and in view of plans to streamline operations to focus on expanding its RE segment,” it said in a filing with Bursa Malaysia.

The sale is expected to be completed in the third quarter of this year.

Tan explains that Borsig’s cashflow is not freely distributable to the KNM Group due to the ring-fencing imposed by the German banks under a credit facility agreement.

“Therefore, the sale of Borsig will allow us to address most of the cashflow requirements of the group to meet its short-term debt obligations of RM1bil as at March 31, 2022.

“This is particularly to rectify the default due to the repayment to the Asia Development Banks’ Credit Guarantee and Investment Facility,” Tan says.

Unlocking value

Tan points out that the sale price represents 194.6% of KNM Group’s market capitalisation of RM533.1mil as at May 27, 2022, and as such, would also indirectly unlock the value of Borsig – which he says is not reflected in KNM’s current share price.

The proposed sale of Borsig will result in KNM Group recognising an estimated net loss of RM490.6mil, mainly arising from goodwill and intangible assets, of which a portion amounting to RM355.7mil had been impaired in December 2021.

Tan notes that the loss is based on the accounting of its book value, which is mainly due to non-cash impairments of goodwill and intangible assets.

“Cashflow wise, KNM Group is expected to fully recover its investment cost of €350mil (RM1.7bil) plus a cashflow return of 14%,” he says.

He adds that KNM Process Systems Sdn Bhd, the holding company of Borsig, had received cashflow of €212.8mil (RM1bil) from Borsig over the years. Borsig was purchased by KNM via DKNM in 2008.

“Upon the sale completion, KNM Group will have recognised a total cash inflow of €398.2mil (RM1.9bil),” he says.

Tan points out that post the Borsig disposal, the group would still have RM1.4bil worth of assets to potentially unlock within the near term.

“Fundamentally speaking, we will have about RM1.3bil of assets plus approximately RM299mil in cash against borrowings of RM391mil. This translates into a net tangible asset per share of 36 sen,” he says.

Tan points out that the group’s gearing level is expected to be reduced from 1.2 times as at March 31, 2022 to 0.3 times post the Borsig sale.

He adds that with lower borrowings, the finance cost is expected to be reduced by RM85mil per annum, compared with RM108mil per annum currently.

Tan points out that KNM Group’s existing loan portfolio are mainly capital expenditure loans, which contributed 88% of the finance cost.

“After the disposal, we expect the interest savings from the lower gearing will be sufficient to cover the profit contribution from Borsig to KNM. With the reduced gearing, we will be able to be more focused on developing our businesses,” says Tan.

Monetising investments

Meanwhile, KNM Group will continue to pursue the monetising of its investments in Thailand and the United Kingdom via joint ventures or outright sale, and the listing of FBM Hudson ItalianaSpA and FBM-KNM FZCO on the Singapore Stock Exchange.

“Our business strategy, moving forward, is to expand in the RE industry through organic growth or joint ventures with the long-term objective of increasing the profit contribution of the RE business to 50% of KNM Group’s consolidated income,” says Tan.

He adds that KNM Group will continue to look for business opportunities in RE that requires moderate capital investment, “so that it will not stress the financial resources of KNM Group.”

“This is part of our strategy to revamp our business model to generate more recurring income,” he says.

He says the group will develop its product portfolio via joint ventures, technology licensing as well as in-house research and development to include higher value-added products and markets to improve its margins, and replace the financial contribution of Borsig.

Tan also explains that for the group’s existing fabrication business, it will invest into higher automation and digitalisation, which will allow it to reduce its manpower dependency, increase productivity and shorten delivery time to customers.

Regarding challenges, Tan says they include the timely replenishment of new orders to KNM Group that were deferred by customers for the past three years due to the low and volatile crude oil price.

“The continuous easing of lockdowns in major economies will encourage further recovery of the global economy. These factors will encourage more capital expenditure by the oil majors. Thus, we believe this challenge will be more manageable in the future,” he says.

Tan adds that the group will continue to regularise its cashflow, which were mainly locked in the capital-intensive projects such as the Thai ethanol plant and the United Kingdom’s waste-to-energy projects.

“We will explore the green energy sector through our Peterborough, England, project and restart our ethanol production facilities in Thailand,” he says.

Meanwhile, the steep rise in prices of commodities and other materials over the past year has also impacted the KNM Group.

Tan notes that 60% of the production cost of the group’s process equipment fabrication business is steel plate cost, where prices have increased by around 40% (carbon steel) to 75% (stainless steel), depending on specifications (as compared with pre-Covid 19 prices).

“Nevertheless, this affected the entire industry as a whole, and therefore it does not cause specific disadvantage to KNM Group as our competitors are also sourcing their raw materials from the same suppliers,” he says.

Tan explains that the group also quotes its prices to customers based on the material costs quoted by the suppliers on a back-to-back basis.

“This will to some large extent reduce our raw material price increase exposure. Meanwhile, the balance of 40% of the production cost is mainly manpower cost and factory overheads, which are within our control,” he notes.

Meanwhile, the current high crude oil prices augur well for KNM Group’s customers, especially those in the oil and gas sector.

“This has enabled our customers to afford the higher price of our products. The underlying industries that drive our business prospects such as oil and gas, petrochemical and energy are growing,” says Tan.

As for global supply chain disruptions, Tan says regarding raw material procurement – under the prevailing situation, KNM Group expects up to a month’s delay in shipment of its raw material (compared with the previous norm).

“Nevertheless, we will factor in this potential delay into our project timeline and communicate it to our customers in advance,” he says.


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