OUR TAKE
Better than nothing, but our FY10 forecast stays. KNM last announced a contract in early October 2009 when it was awarded a RM155m process equipment contract by its international clients for their overseas projects. After a quiet 3 months, KNM has now secured new bioethanol contract worth RM143m. Although we think that this award would be positive for company, the contract value is immaterial - at less than 5% of its total revenue given the tremendous size of its overall business with a FY10 forecast revenue of RM2.8bn - we are keeping our FY10 earnings forecasts unchanged.
Needs bigger contracts to lift it to the next level. As we mentioned before, we are still hopeful that the company would secure some of the following contracts, including: 1) RM500m-RM600m from the Verwater JV; 2) a portion of the jobs from Saudi Aramco to Technip to build a refinery in Jubail, and 3) some jobs potentially coming from the Gorgon LNG plants. We believe that these contracts would be more meaningful to the company as their values would be sufficiently material for us to initiate an FY10 earnings upgrade. In order to achieve meaningful orderbook replenishment for its large tenderbook amounting to RM14bn, technically KNM should achieved roped in about RM900m/quarter (RM14bn x 25% success rate / 4 quarters) worth of contracts.
But prospects looking up as oil price rises. Given that KNM has a global presence and the fact that crude oil is trading at above USD80/barrel, we believe the company would soon be picking up more O&G jobs. Compared with its peers, a higher oil price would have a bigger impact on KNM since O&G production cost varies in every country, from USD20 to USD60/barrel. Hence, a higher oil price would make commercial sense for its customers to start up more projects, especially the non-conventional ones as the conventional production is depleting the day.
Maintain Buy. Our target price for KNM remains unchanged at RM0.93 based on a PER of 10x FY10 EPS. Currently, the company has an orderbook and tenderbook worth more than RM2.5bn and RM14.0bn respectively, which should keep it busy for the next 1 year.