- We upgrade our call
on KNM Group from SELL to HOLD as the share price has fallen to our unchanged
fair value of RM0.55/share, which is based
on a 20% discount to our adjusted book value estimate of
RM0.71/share.
- Our adjusted book
valuation still excludes the group’s RM780mil goodwill arising from the
acquisition of BORSIG Beteiligungsverwaltungsgesellschaft mbH (Borsig), but we now
have not included any dilution for the 489mil free warrants attached to the
1-for-2 rights issue, which was priced at RM0.40/share. This is because the
warrant exercise price has been fixed at RM1.00/share, which is currently
out-of-the-money.
- KNM’s rights issue
had been over-subscribed by 31%, which means that the group raised total
proceeds of RM196mil. This is a positive development as the rights proceeds
will enable the group to avert from defaulting on RM190mil commercial
papers/medium term notes, of which a large portion expires soon.
- But we still view
the group’s earnings prospects as challenging given the current global
environment and the long-term development of the RAPID project. Even though the
group has successfully acquired the GBP25mil (RM124mil) Peterborough land with
a UOB credit facility, the project still requires a massive GBP233mil
(RM1.2bil) for the first phase involving a 35MW waste-to-energy plant and a larger
GBP251mil (RM1.2bil) for Phase 2’s additional capacity of 55MW.
- The group still
plans to list its 100%-owned Borsig in Singapore to raise further cash
proceeds. But we continue to view the group’s indicative valuation of
RM1.8bil-RM1.9bil for Borsig may be too high given its FY11 PE valuation of 16x-17x,
while the rest of the group’s operations are currently suffering losses. As
management indicated that Borsig is already operating at almost full plant
utilisation, we do not expect its forward earnings growth to be significant
given the current global economic environment.
- As a comparison,
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 9x.
- Given KNM’s weak
balance sheet and losses for its other segments, 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.
- KNM currently
trades at an adjusted PBV of 0.7x, which is at the lower range of its 0.7x-1.1x
over the past three years.
Source: AmeSecurities
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