KNM Group - Secures RM309mil Russian contract HOLD

- We maintain our HOLD call on KNM Group with an unchanged fair value of RM0.55/share based on a 20% discount to our adjusted book value estimate of RM0.71/share. Our diluted book valuation excludes the group’s RM780mil goodwill arising from the acquisition of BORSIG eteiligungsverwaltungsgesellschaft mbH (Borsig). 

- KNM has secured a letter of award worth US$100mil (RM309mil) from Public Stock Company TAIF-NK for the supply of a Sulphur Recovery Unit for the Heavy Residue Conversion Complex located at Nizhnekamsk, Tatarstan, in the Russian Federation. The project is expected to be completed within 28 months from date of the contract.

- This is the single largest contract which KNM has secured since the US$216mil (RM680mil) LukOil Uzbekistan award way back in 2010. While there was another smaller contract later awarded by LukOil, we note that KNM’s new order wins have been sporadic with minimal fresh awards in 3QFY12. 

- We expect this Tatarstan contract to stabilise KNM’s order backlog at around RM1.8bil (0.8x FY13F revenue), assuming 4QFY12 depletion of RM600mil. But while this news is positive for KNM, we view that prospects of additional large wins of this scale remain opaque at this stage given the current weak global environment and the long-term development of the Refinery and Petrochemical Integrated Development in Pengerang, Johor. 

- Even though the group has successfully acquired the GBP25mil (RM124mil) Peterborough land in the UK with a UOB credit facility, the commencement of project is still uncertain as it still requires a massive GBP233mil (RM1.2bil) for the first phase involving a 35MW waste-toenergy plant and a larger GBP251mil (RM1.2bil) for Phase 2’s additional 55MW.

- The group still plans to list its 100%-owned Borsig in Singapore to raise further cash proceeds this year. But we continue to view the group’s indicative valuation of RM1.8bilRM1.9bil for Borsig as too high given its FY11 PE valuation of 16x-17x, while the rest of the group’s operations are currently suffering losses. Furthermore, as management indicated that Borsig is already operating at almost full plant utilisation, capacity constraints and external pricing pressure could limit its forward earnings growth. 

- We maintain FY12F-FY14F earnings pending the release of KNM’s results, tentatively scheduled for 25 February. The stock 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