KNM Group Bhd
(July 13, 52 sen)
Maintain hold at 52 sen with target price of 55 sen: KNM has secured RM1 billion worth of jobs thus far, double what it secured in 1H2009. Its current order book is at a year-high of RM2.4 billion, compared with RM1.8 billion at the beginning of the year. Its average selling price (ASP) has also improved moderately to close to RM20,000/MT from a low of RM18,500 in 2009 (record high of RM22,500 in 2008). We understand KNM is eyeing several sizeable contracts (more than RM100 million) in Southeast Asia and Europe. We expect accelerating oil and gas activities for the rest of this year to drive future demand for process equipment.

KNM may add two more plants to extend its global market presence. But the investments would be small at about RM40 million, with a potential JV local partner. KNM expanded its Saudi Arabia capacity recently, bringing total group capacity to 157,300MT/year (+6.8%). Meanwhile, its Kuantan plant is currently being upgraded to manufacture Borsig's boilers for the global market. There is also a plan to package Borsig's membrane equipment in Malaysia to take advantage of the RM1.4 billion tax incentive and improve overall cost efficiency.

We are maintaining our earnings assumptions at this juncture, as utilisation rate remains low at 60% and margins are still expected to be sluggish in 2Q2010. Re-rating catalyst for the stock would depend on job orders in 2H2010. We reiterate our hold rating for KNM with a target price of 55 sen, pegged to nine times FY2011F PER. The counter is currently trading at 8.4 times FY2011F PER against the sector's 8.8 times and the region's 15 times. ? HwangDBS Vickers Research, July 13

This article appeared in The Edge Financial Daily, July 14, 2010.