• We maintain SELL on KNM Group with an unchanged fair value
of RM0.75/share pegged to an FY12F PE of 10x – a 30% discount to the oil &
gas sector’s 15x.
• KNM paid RM0.3mil (GBP65,000) to extend the completion of
the proposed acquisition of a 55-acre vacant development land in Storey’s Bar
Road, Peterborough, England by one month from 6 June 2012 to 6 July 2012.
Recall that the group had earlier in January this year paid an exclusivity fee
of GBP500,000 (RM2mil) to reserve the land for its proposed GBP25mil (RM120mil)
purchase from Poplar Holdings Ltd (Poplar).
• The land is registered under Poplar’s wholly-owned Poplar
Investments Ltd, which is based on the Isle of Man tax-haven. This fee is only refundable when Poplar is
unable to execute the sale due to ‘legal or other circumstances beyond its
reasonable control’. This project, which was announced back in December 2010,
was set up by local businessmen who were granted consent for this project by
the UK Government’s Department for Energy and Climate Change (DECC) in November
2009. The concessionaire had earlier attempted to secure a bond to finance this
project but subsequently sought a US-based investment fund, which also appears
to be unsuccessful.
• With the Peterborough land ownership, we understand that
KNM could possibly end up with an 80% stake (with the balance held by UK-based
sponsors) in this waste-to-energy concession, which could cost up to GBP600mil
(RM2.9bil), if the group could secure external borrowings. Additionally, there
is also a possibility that KNM could end up with a 51%-stake in the separate
US$248mil (RM760mil) waste-to-energy 40MW plasma gasification facility in Sri
Lanka in a joint venture with Octagon Consolidated.
• We view these developments negatively as the huge capital
expenditure will likely elevate the group’s current net gearing level of 0.5x
to a worrisome 2.8x, unless other investors dilute KNM’s equity stakes in these
projects to an associate level. Currently, KNM is still sourcing for financing
for both projects.
• KNM’s current order book stands at RM5.8bil, with new
orders secured up to RM1.8bil for this year and tendering up to RM18bil
potential orders. But as noted in our past reports, over half of the group’s
order book does not have clear visibility in commencement.
• Normalising tax rates, KNM currently trades at a pricey
FY12F PE of 30x, way above the oil & gas sector’s. This is unjustified
given KNM’s persistently poor quarterly earnings delivery.
Source: AmeSecurities
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