Stock Name: KNM
Company Name: KNM GROUP BHD
Research House: RHB

KNM Group Bhd
(Dec 15, RM2.68)
Maintain outperform at RM2.33 with revised fair value of RM3.09 (from RM2.33): The company announced on Dec 14 that it is establishing a JV company with Petrosab Logistik (KNM Petrosab Sdn Bhd (KNMP)). Its total initial investment will be RM51,000 for a 51% stake in the company, but we have been guided that the paid-up capital of the company will be increased soon. Petrosab Logistik is a joint venture between Yayasan Sabah and Asian Supply Base Sdn Bhd (a wholly-owned company of Sabah Energy Corporation).

We are positive on the JV given that the tie-up with the Sabah government will improve KNM's success rate for potential contracts in the state. Besides this, a presence in East Malaysia is imperative for oil and gas players, given that most of the deeper water developments are located in the region. We believe the company will move some of its fabrication capacity from the peninsula to Sabah to support the venture.

The company has guided that it has its sights on the Kimanis and Sipitang areas for contracts. While we have not heard of potential contracts from Sipitang, we note that confirmed projects in Kimanis include the Sabah Oil and Gas Terminal (SOGT) and the 300MW power plant that is jointly owned by Yayasan Sabah and Petronas Gas. Another proposed Petronas project in Kimanis is the urea and ammonia plant.

We are upgrading our FY11/12 revenue assumptions by 9.6% and 5.8% respectively as we have increased our capacity utilisation forecasts for FY11/12 to 67.3% and 73.6% respectively (from 60.9% and 68.6% previously). This results in our FY11/12 core earnings per share increasing by 15.1% and 12.5% respectively.

Risks include sustained competition for mid-end process equipment; and slower than expected pick-up in E&P activities and contract flows.

Things look increasingly positive for the company going forward, and the pick-up in contract wins suggests that the company is heading for an earnings turnaround in 2011. As such we maintain our 'outperform' call on the stock with an upgraded target price of RM3.09 per share based FY11 target price-earnings ratio of 15 times (from RM2.33 per share and 13 times target PER previously). Our new target PER is line with the company's historical average one-year forward PER. ' RHB Research Institute Sdn Bhd, Dec 15


This article appeared in The Edge Financial Daily, December 16, 2010.