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Them OnG Stocks!

Wednesday, August 1, 2007

My Dearest Sahamgurl,

  • Btw, I notice you seldom write on O&G stocks in Malaysia..what are your thoughts on that? Personally, I like KNM, maybe UMW.Thanks!
I am full of admiration for what KNM has done as a stock. Absolutely brilliant. However, as a business, I shall hold my reservations because in my opinion (I could be wrong here) the main driving factor behind KNM success is its acquisitions of other businesses. On one hand, these acquisitions has brought them great success, however I do believe that it's so difficult to lay judgment because if I view KNM from a business perspective, it's so difficult to gauge what's happening underneath it all the acquisitions and all its overseas ventures.

To give you a brief idea on what I am saying here.

KNM was listed back in 2003. A year later, here are some comments from Mayban Research (now Aseambankers) on KNM's JV with FBM.

  • KNM’s JV with FBM-Hudson Italiana SpA (FBM) for acquisition of 50% equity interest in FBM's manufacturing plant in Jebel Ali Free Zone, Dubai (FBM-KNM FZCo) for Euro10m (=RM45.6m based on the exchange rate RM1.00: Euro0.2191)was completed on 15 October 2004. In addition, the Commercial Co-operation Agreement (CCA) with FBM for joint and exclusive marketing and manufacturing of FBM's process equipment within the Asean and China regions will take effect on 15 October 2004.

    Recall that FBM is the main income-generating unit of the Hamon Group’s process heat exchange business and is one of the top two global companies for air cooled heat exchangers for the oil, gas and petrochemical industries. Its plant manufactures aircooled heat exchangers, shell and tube exchanges, reactors, pressure vessels, condensers and desalination equipment for the oil and gas industry. With the completion of the exercise with FBM, KNM will have additional 3,000 tons of manufacturing facility.

Now using business like perspective, when I purchase this company, I have to consider myself as a part owner of this business. So if I am a part owner, surely, I would like to know what's happening with such ventures etc etc.

Here is the link to their last earnings report. Quarterly rpt on consolidated results for the financial period ended 31/3/2007. Open its word file attached and on the third page, you will see the following.

That's all they reported.

Now here's an interesting exercise. Go to Bursa website and under KNM's historical announcement web page, do a CTRL f (find) search on the word 'Acquisitions'. And you will be simply amazed by the number of aquisitions announcements made by KNM!

So if one uses the business-like investing approach, surely one would not be too comfy because one never truly knows exactly the results or what's happening after each acquisitions. Did the acquistion actually boost KNM's earnings? By how much? What's underneath it all?

Having said that, here is how KNM has done as a company.



And as you can see by the numbers, KNM has done pretty well. Despite its aggressive global expansion, it has done a wonderful job with its cash management. Receivables are slightly high and definitely could have been better but it's at a rather acceptable level.

And here is where it gets tricky. On one hand, as explained earlier, one might not be too comfy due to mainly lack of details from KNM on how each acquisitions has fared since. However, on the other hand, as whole, the end result is there. KNM has done brilliantly too! So for me, it really depends on the individual. We are all different and we all have our own mindset. For example, based on current results, one does have the justifications to continue to be bullish about KNM's future prospects. On the other hand, the conservatists, they might hold back since the success was derived from aggressive expansions and there is simply not enough information to gauge what's happening underneath all them acquisitions (they might even question on how long KNM can play this acquisition game!)

UMW.

Here is the link to their Q1 earnings.
Quarterly rpt on consolidated results for the financial period ended 31/3/2007



Let's compare that Oil and Gas earnings with what UMW achieved last year, same period.
Quarterly rpt on consolidated results for the financial period ended 31/3/2006



As can be seen, last fiscal year, for the same quarterly earnings, UMW's OnG earnings was absolutely bang on! They made a whopping 37 million from their OnG division. So perhaps, the perspective investor might want to know what happened this fiscal year where UMW only made 9.019 million.

Anyway, last fiscal year, UMW's OnG sector was absolutely brilliant! (This sector is hot and I am indeed optimistic about it). See UMW's Q4 earnings here:
Quarterly rpt on consolidated results for the financial period ended 31/12/2006

Under the Segmental Reporting, UMW reported that its OnG division reported earnings of 251.514 million from a revenue of 1.441 billion. This is absolutely impressive. A rising star or a hidden gem sector within this group?

So the potential is there. However, the last reported earnings showed tremendous weakness in this OnG sector.

Why?

According to UMW in its Q1 earnings notes.

  • The lower revenue was mainly due to lower vehicle sales and the deconsolidation of the financial statements of Wuxi Seamless Oil Pipe Co., Ltd. from 15th November 2006, when it became a 30.6%-owned associated company of the Group.

So a change in accounting treatment, sees UMW declaring Wuxi as an associate company instead of a subsidiary.

So the potential for UMW's OnG division to deliver is certainly there.

Hope my second opinion helps.

Regards

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