Some Musings on KNM Reports

Mentioned in RHB research report this morning.

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Management is giving guidance that FY08-09 net earnings to be around rm450million and rm700 million respectively.

And here is the financial statistics posted by RHB.

This is incredible really.

For its fy 2007, KNM earned a very impressive 188 million. However the management is guiding net earnings of a whopping 450 million.

This as stated in the table above, equates to a growth of a whopping 135.3%!

Yes, KNM has made several acquisitions and was awarded several new projects but for the management to guide that the company net earnings would grow by some 260 million or 135.3% is really amazing!

As it is, based on current or trailing earning, as stated by RHB, KNM trades at 27 times multiples.

Risk is rather obvious if KNM fails to deliver such loft projections!

If you ask me, I better be mighty aware of the lofty guidance made by the company!

Anyway RHB has stated the following risk involved.

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OSK carried the following comments:

• No cannibalisation from Belgium’s Ellimetal. Early this year, KNM announced an acquisition of a Belgian process equipment manufacturer for €20m (RM96m). Management yesterday clarified that there will be no direct competition against KNM’s current business due to overlapping in product offerings, as 70% of Ellimetal’s sales are directed to European customers for projects in the EU countries. To note, Ellimetal adopts high level of automation in its manufacturing of process columns and reactors, and hence management expect some synergies to improve production method in Malaysia.
  
  Focus on future high demand sector. KNM has also recently entered into an operating agreement with David K Stevens (DKS) to undertake sulphur technology business, which we think is crucial for KNM to enter the environment industry especially when there are very limited players equipped with this technology. To elaborate, sulphur technology is a unique method used for recovering sulphur and energy from acid gases captured during the processing of high sulphur oil and natural gas. DKS, who is a patent holder for sulphur removal and recovery technology for the oil and gas applications, has extensive experience in this field. We foresee additional growth to come from here driven by rising global warming issues going forward.
  
  Potential 2nd biodiesel project. Management yesterday has also announced that it is likely to secure a 2nd biodiesel project from Midwest BD (MBD) Biodiesel Ltd of Australia to do design and EPCC works for a biodiesel plant in Townsville, Queensland. It is estimated to have a capacity of 250,000 tonne p.a., using Algae as feedstock and Axen’s technology. Although the value of the contract was not disclosed, mirroring the previous contract that KNM secured from Mission Biofuels with similar capacity, we believe the 2nd contract could worth about RM120m. We have correspondingly factored this into our projections. Note that, our forecasts already included our earlier expectations of another 3 biodiesel plants from Mission Biofuel. Lower earnings estimates. We are delaying our profit contribution from Borsig by one month and hence lower overall GP margin for the process equipment segment. We also raise our estimates for depreciation slightly while keep our forecast for effective tax rate at 13%. As guided by the management, tax rate could be lower due to reinvestment allowances for its acquisitions of Borsig as well as Ellimetal.
  
  Downgrade to Neutral. The net impact of our earnings adjustment is an 8% drop from our previous forecast. We are taking a prudent stance on KNM’s ability to integrate Borsig, given that it is the biggest ever acquisition thus far. Besides that, considering the current weak market sentiment, we lower our rating to Neutral from Trading Buy. Our revised fundamental fair value is at RM5.25, derived backwards from our fully diluted exrights & bonus based on 16x valuation multiple for the whole O&G sector. For a better comparison with our previous Trading Buy target of RM7.90, lower earnings forecasts reduce the fair value to RM7.20.

Ah, there's a bonus + rights issue being planned.

Here is how OSK made their calculations.