KNM Group - Planning to list Borsig on SGX Sell

- We maintain our SELL call on KNM Group, with an unchanged fair value of RM0.55/share, based on a 10% discount to our diluted book value estimate of RM0.61/share.

- Our diluted book valuation excludes the group’s RM789mil goodwill arising from the acquisition of BORSIG Beteiligungsverwaltungsgesellschaft mbH (Borsig) from KNM’s adjusted book value and assumes the proposed rights issue and warrant exercise price at RM0.40/share. 

- KNM has appointed UOB Bank Ltd as the sole manager, underwriter and the placement agent for the proposed listing of the group’s wholly-owned Borsig on the Main Board of the Singapore Stock Exchange (SGX), likely by August 2013.

- Recall that Borsig is a leading designer and manufacturer of high-end process gas waste heat boilers, quench coolers and scrapped heat exchangers. KNM currently leverages on Borsig’s high-end end expertise to spearhead the group’s tenders worldwide. 

- While Borsig remains a subsidiary of the group should the SGX-listing be successful, we are uncertain about the company’s subcontracting process and likely transfer pricing mechanism with the rest of KNM.

- Borsig, which has a debt-free balance sheet and currently operates at almost full plant utilisation, registered a net profit of EUR29mil in FY11 and EUR14mil in 1HFY12.

- The announcement indicated that Borsig’s SGX proposed listing could have an indicative valuation of between RM1.8bil–RM1.9bil. This translates into a high prospective PE of 16x-17x.

- These valuations appear high compared to 12x for worldrenowned US-listed Cameron International, which produces process equipment for the oil & gas industry. SGX-listed Technics Oil & Gas, which engineers and fabricates topside modules, gas compressors and power generators for offshore platforms and FPSOs, currently trades at an FY13F PE of only 8.5x.

- Given KNM’s weak balance sheet, a more conservative PE valuation of 10x could mean a prospective market valuation of RM1.1bil vs. Borsig’s acquisition cost of RM1.7bil (EUR350mil) in 2008. This could mean a potential write-down of RM600mil in FY13F, translating into 37% of KNM’s shareholders funds currently.

- While the SGX-listing could raise RM275mil (42% of endFY12F net debt) in IPO proceeds assuming KNM’s stake in Borsig falls from 100% to 75%, we note that the group still plans to undertake its highly dilutive rights issue. Pending further development on the proposed Borsig listing, we maintain FY12F-FY14F earnings.  KNM currently trades at a premium above our adjusted book value of RM0.61/share vs. a discount of over 10% in the past.

Source: AmeSecurities