Highlights

Revival around corner after painful lesson learned…The fall of the kingdom was due to :i) global financial crisis in 08- 09; ii) cost overruns; iii) higher financing cost and mismatch debt maturity which restraint capital allocation; iv) losses in Brazil; vi) privation deal fell through and vii) delay listing of Borsig. Two tipping points: i) secured EUR220m to refinancing its loan and ii) disposal of Brazil business. Both will result in total saving of RM29-39m per annum.

RAPID is a strong re-rating catalyst… KNM, being among the largest process equipment manufacturer should be one of the main beneficiaries for RAPID project. With assumption of 12% market share, we expect KNM to bag a total of RM2.2bn contracts or RM540m per annum (85% of FY13 Asia and Oceania revenue) based on contract duration of 4 years.

EnergyPark Peterborough is a game changer and Phase 1 (23% of total 80MW) will add RM0.39 to our TP… With the Europe economy improving and healthier balance sheet due to loan refinancing, KNM is a step closer to achieve financial closure. It expects the construction of EnergyPark to start in 4Q14 and contribute in FY17. By assuming project IRR of 13%, interest rate of 4% and 80% equity stake, we expect Phase 1 (18MW or 23% of total 80 MW) to generate around RM40m (~1.7x FY13’s PAT) to company’s bottomline. By pegging at 16x P/E (in line with company target P/E and conservative as compared to concession of 25 years), we estimate Phase 1 to add RM0.39 NAV per share to our target price.

Riding on recovery in Euro zone … As economic recovery in the Euro zone gains traction with prospect of exiting austerity measures, Borsig stands to benefit from increased spending from oil and gas majors. From the recently secured €220m loan facility, €160m will be allocated for future working capital. This will provide war chest for future potential contracts. In addition, potential relisting of Borsig in next few years might give better value to KNM.

Turnaround story with strong earnings growth.. Net profit is expected to grow at stronger pace with CAGR of 74% from FY13 to FY16 as EBITDA margin is projected to improve from 10% to 11.7% in the same period due to; i) lower financing cost and ii) cost saving resulting from the disposal of loss making Brazil business. Balance sheet is expected to improve further with its net gearing to fall from 0.33x in FY13 to 0.16x in FY16.

Catalysts

• Announcement of RAPID contract win.
• Financial closing of EnergyPark Peterborough.
• Strong quarterly earnings due to lower finance cost.
• Relisting of Borsig to unlock value.

Risks

Fluctuation in the oil price; Project execution ability; Delay in contracts award.

Valuation

We initiate coverage on the company with a target price of RM1.35 based on 16x FY15 P/E, premium to its peers’ average target of 14-15x given its strong earnings growth prospect (CAGR of 55% from FY14-FY16). Our TP have not factored in value from EnergyPark Peterborough yet. BUY.

Source: Hong Leong Investment Bank Research - 2 Jul 2014