KNM Group Bhd - New Sulphur Recovery Unit Contract

News    Yesterday, KNM (“KNMG”) announced that it had secured a Letter of Award (“LOA”) from TAIF-NK (a production and investment company comprising 67 subsidiaries and affiliated companies operating in various areas with principal activities in oil and  gas processing and petrochemistry, telecommunication, building and construction, banking and investments, and services) to supply a sulphur recovery unit (“SRU”) for the heavy residue conversion complex (“HRCC Project”) located at Nizhnekamsk, Republic of Tatarstan, Russia. 

 The contract amounting to USD100m (c.RM308.6m) is estimated to be completed within 28 months.

Comments   The contract is KNMG’s first material contract win for 2013 and in a long time (its last contract secured was in late 2011). 

 We understand that the design and engineering works could start in 2QCY13, as such estimated completion date could be by mid-CY15 to 3QCY15.

 The annual RM100m revenue from this job accounts for only 4% of our projected FY13-14 group revenues. 

 As such, we believe it falls within our contract replenishment assumptions and thus will not boost our forward net profit forecasts. 

 The contract will lift KNMG’s order backlog to RM4.3b (from RM4.0b as at Sept-12). However, we highlight that around 50% of this order backlog is attributable to its long-awaited Peterborough project worth RM2.1b. 

Outlook   KNM is set to announce its 4QCY12 results by end-Feb. FY12 net earnings are expected to be in the black due to 1) its legacy loss-making projects would have been completed within CY12 and 2) the efforts undertaken to improve cost efficiency and productivity.

 Some plant capacity rationalisations are expected as certain plants (e.g. Brazil/Indonesia/Australia) seem to be suffering from low utilisations.

 The Peterborough and Octagon projects are currently at status quo. However, the company has targeted to secure financing for Peterborough soon.

Forecast   No changes to our forecasts at this juncture.

Rating     MAINTAIN MARKET PERFORM

Valuation    Based on an unchanged 9.0x targeted PER on CY13 EPS of 5.9 sen, we are maintaining our fair value of RM0.53. 

 The discount to the sector’s average PER of 15x is due to the significant earnings risk present given KNM’s historical bottom line volatility.

Risks   1) Inability to secure more contracts going ahead and       

2) the continued delay of its headline projects like Peterborough and Octagon.  

Source: Kenanga