KNM --- HOLD

FROM ECM LIBRA
RM143m job from Thailand OIL & GAS
· News
KNM Group (KNMG) yesterday announced that its wholly-owned subsidiary, KNM Process Systems Sdn Bhd and its affiliated company, KNM Projects (Thailand) Co. Ltd, had on 7 January 2010, collectively secured a substantial new order amounting to THB1.3bn (RM143m) from
Impress Ethanol Co. Ltd for its bio ethanol project in Thailand. The project involves the engineering, procurement, construction and commissioning (EPCC) of a 200,000 litres per day cassava based bio ethanol plant in Chachaengsao, Thailand and is expected to be completed within 18 months. Besides this, KNM also proposed an internal restructuring exercise
yesterday to streamline their businesses in the Caspian region. It generally involves the forming of KNM Europa BV that will house subsidiaries in Kazakhstan, Turkmenistan and Uzbekistan. No gain or loss will be incurred from the internal restructuring. (Bursa Malaysia)
· Comments
The contract follows swiftly after the group’s announcement late November 2009 that they were investing (maiden venture into Thailand) in 2 dormant companies in Thailand. We most certainly view the job award positively given the group’s contract drought over 2009. To note, the group does have some exposure to the biofuel industry prior to this. Recall back in mid2007, they were building a biodiesel plant for Mission Biofuels in Pahang for RM122m. We see no earnings adjustments necessary for the contract as it forms part of our replenishment expectations for FY10 and FY11. In terms of margins, we believe that at least 15% at EBIT level should be achievable. To note, total group orderbook currently stands at an estimated RM1.5bn
inclusive of this job and this should be just sufficient to take them through 2010. Naturally, we expect more contract flow to be seen from KNM over 2010.
We maintain our TP of RM0.74 and HOLD call on KNM for now. This is based on a 12x historical average PE pegging FY10 prospective EPS. Our hesitance at this point of pushing the stock to a BUY is due to the margin erosion seen in 3QFY09. We are concern that this will continue
into 2010 as the group grapples to be more competitive than other process equipment players and may compete for lower end jobs that generally yield lower margins in order to beef up plant utilisation. Group utilisation is still low for now at <70% compared to hitting past 80-85%
pre-crisis.