Written by Financial Daily
Thursday, 03 December 2009 11:05
KNM GROUP BHD []
(Dec 2, 72.5 sen)
Reiterate underperform at 71 sen, fair value at 65 sen: KNM announced that it had terminated the memorandum of agreement with Societe Des Hydrocarbures Du Tchad SA (SDH) to develop, operate and maintain the Sedigi oilfield facilities (comprising production facilities, liquid petroleum gas processing and bottling plant and 30MW gas power plant) in Chad.
As such, the EPCC contract worth RM310 million as well as the five-year concession to operate the Sedigi Oilfield Facilities would also be cancelled.
With the removal of the engineering, procurement, CONSTRUCTION [] and commissioning (EPCC) contract, KNM’s order book now stands at around RM2.8 billion (versus RM3.1 billion previously).
We note that the company has only secured contract worth around RM200 million in the third quarter (3QFY09). Hence, we believe KNM will unlikely meet its FY10 earnings projection as the company will need to secure RM1 billion to RM1.5 billion worth of new jobs in 2HFY09 (which implies two to three times more jobs than it secured in 1HFY09).
Furthermore, we highlight FY10 to FY11 earnings risk arising from potential deferment and cancellation of contracts secured from the Middle East given the recent Dubai World credit crisis.
Risks to our earnings projections include higher capacity utilisation arising from stronger order book and margin expansion due to cross-selling and cross-manufacturing of high-end Borsig’s process equipment.
We have cut our FY09 to FY11 earnings projections by 3%, 9% and 5%, respectively, after factoring in lower order book arising from the cancellation of the above contract.
We believe any upside to FY10 earnings would depend on the stronger recovery of oil price to above US$80/barrel, which would revive more non-conventional oil sands projects, and hence raise the demand for higher-end process equipment.
Accordingly, our fair value is cut to 65 sen/share (from 72 sen/share previously), which is based on an unchanged one-year forward target price-earnings ratio (PER) of 11 times. While longer-term earnings visibility remains bright, we believe medium-term earnings risk has risen due to uncertainty about its order book. Hence, we reiterate our underperform call on the stock. — RHB Research, Dec 2
This article appeared in The Edge Financial Daily, December 3, 2009.
