KNM Group - UNDERPERFORM - 22 June 2012

News    KNMG has proposed a one-for-two (1:2) rights issue with free detachable warrants for the rights shares on a one-for-one (1:1) basis. 

 The indicative issue price (which should not be below the company’s par value of RM1) of the new rights will be payable in two calls. The first call price will be set at 40% of the new rights share price while the remaining call (60%) will be capitalised from the company’s share premium account. 

 Completion is expected by 4QCY12. 

Comments   We are unsurprised by the announcement as KNM had previously hinted of such an exercise back in May-12.

 Based on a maximum scenario, KNM’s share base will increase to 1.5b shares (from 1.0b) while on a fully-diluted basis, its share base will increase to 2b. 

 At 40% of an indicative price of RM1/share, the new issuance will raise cash proceeds of RM200.2m. The free detachable warrants will raise another 500m shares (when fully exercised).

 Assuming the rights and warrants are priced at RM1/share each, our FY12-14 EPS could be diluted by 40.4-44.6% respectively. 

 Management guides that the fund-raising is for debt repayment and/or working capital commitments but (as mentioned previously), we believe the proceeds from the rights issue will be utilised for its unconventional key projects like the Peterborough and Octagon Consolidated Waste-ToEnergy projects that KNM seems to have some/or potential equity ownership in.

 If so, we are cautious on the fund raising exerciseas these projects seem to have uncertain visibilityin terms of achieving ‘financial close’ independently.

Outlook   Cautious on the company’s near term earnings capability. We also note that there has been a delay of financing approvals for two of its large projects (Peterborough and Octagon Consolidated), which make up the majority of its order book.

Forecast   We maintain our forecasts pending the completion of the exercise.

Rating  MAINTAIN UNDERPERFORM

Valuation    Fair value of RM0.73/share, based on 9.0x PER (a discount to the sector average of 15x due to the risk of its earnings) of its FY13 earnings.

Risks   1) Continued delay its projects and 2) No improvement in margins and net profits.

Source: Kenanga