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Will KNM’s earnings keep pace with its share placement?

    It is the group’s fourth private placement in the span of two years.

KUALA LUMPUR (June 18): KNM Group Bhd, a stock that has emerged on the most actively traded list of late, upsized the private placement that was proposed last month to pare debts and fund its working capital. This is a continued attempt by the company to improve its balance sheet.

But after nearly a decade of cleaning up its books, will this be the last big dilutive exercise for KNM shareholders?

Last month, KNM proposed a private placement of up to 987.52 million new shares or 30% of its issued share capital in order to raise RM167.9 million. With fresh capital raised, the group plans to utilise RM44.08 million as working capital with another RM120 million to repay debt.

It is the group’s fourth private placement in the span of two years.  The regulator approved its plan to issue 800.71 million shares at prices between 16 sen and 17.5 sen in the recapitalisation exercise. The number of shares placed in the three placements alone represented over 30% of the group’s issued share capital prior to June 2019.

KNM has raised RM134.05 million in its three placements between June 2019 and Jan 15, 2021. KNM’s share price has had a roller coaster ride during the period. From 7.5 sen in January 2019, it rocketed to 45 sen in October that year. Soon, it plummeted to nine sen in March, 2020.

Comparatively, KNM net profit grew 41% year-on-year (y-o-y) to RM64.19 million for the financial year ended Dec 31, 2020 from RM45.5 million. Earnings per share (excluding discontinued operation) dropped to 2.17 sen in FY20 from 2.38 sen

It is worth noting that KNM’s revenue and operating profit, however, declined y-o-y in FY20, and the group has maintained that the outlook remains challenging in its key segments of oil and gas, petrochemicals and energy.

It slipped back into loss in the financial quarter ended March 31, 2021 (1QFY21), after eight consecutive quarters of profit.

Upon completion of the latest placement, KNM would have raised about RM300 million across the four placements since 2019 — of which around half is to pay debt, about 18% for working capital and capex, and about 28% for procurement purposes.

All of that involved issuance of 1.18 billion shares, or near half its share base at the start of 2019.

Under the new placement, based on the amount it intends to raise, the new shares are expected to be placed at 17 sen apiece. The shares currently trade at 20.5 sen apiece, as improved crude oil prices — now above US$74 per barrel — have lent support to O&G related counters.

Half of the shares would be placed to KNM chairman and largest shareholder Gan Siew Liat and persons acting in concert (PACs), according to KNM filing.

Upon conclusion, Gan will control 19% in the company, while founder and group CEO Lee Swee Ling will hold 6.6%.

Interestingly, despite the multiple placements in the last two years, the group has not announced any new substantial shareholder in the period.

The latest placement could help reduce KNM’s net gearing to 0.5 times, from 0.6 times currently. As at end-March, KNM short-term debt has risen to RM711.9 million, coupled with long-term debt of RM650.7 million.

On a positive note, the two years of profitability in FY19 and FY20 helped the company shave off some of its accumulated losses, although there are still some ways to go with negative reserves of RM177.16 million currently.

The group’s operating cash flow improved in FY20, which will be handy in its attempt to further reduce liabilities while ensuring its projects continue smoothly.

KNM’s difficult path stemmed from its rapid global expansion in the late 2000s, as debt ballooned while the companies it acquired succumbed to industry downturn, cash flow problems and delayed projects.

Over 80% of the group’s top line comes from its businesses in Europe and Middle East, with another 18% from Asia and Oceania. Efforts to right-size the group continues, including attempts to dispose of its subsidiaries under German process equipment manufacturer Borsig GmbH.

Other key subsidiaries include petrochemicals equipment supplier FBM Hudson Italiana SpA.

Moving forward, investors may keep close watch on its 36mw waste-to-energy plant in Peterborough, UK, that is scheduled for completion by mid-2022, and another project to increase the capacity of its bio-ethanol production facilities in Thailand to 500,000 litres per day, from 200,000 litres per day currently.

Perhaps the commissioning of the two projects would be a much-anticipated checkpoint for KNM to reverse the earnings dilution effects arising from its multiple placements over the years — which appears to be a necessity to get out of the debt hole and start afresh. The latest placement will also require shareholders’ approval at an upcoming EGM.

Shares of the company last traded at 20 sen apiece, representing a historical price-to-earnings of 9.2 times and a price-to-book value of 0.34 times. However, the historical EPS was based on existing share capital without the latest massive placement.


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