News

KNM announced SINOPEC Engineering received a LOA from Petronas for EPCC contract in one of the package of oil refining and petrochemical project in RAPID. The contract value is expected to be US$1.33bn. KNM is a selected subcontractor for the execution of the contract.

Financial Impact

We estimated the effective portion for KNM is around US$280-300m. Hence, we maintain our earnings forecasts as we have already factored a total of RM2.2bn RAPID related contracts or RM540m per annum based on contract duration of 4 years.

Comments

We are positive but not surprise by the contract win. As mentioned in our initiation report titled “Phoenix Reborn!!” dated 2 July 14, KNM being among the largest process equipment manufacturer should be one of the main beneficiaries of 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.

In addition, KNM has also submitted bid for sub-contractors job for the other packages of refinery plant and EPCC contract for tank farms and other associated facilities. We believe this RAPID contract win is just the beginning of the earnings turnaround story and will significantly boost investors’ confidence on the company.

We expect more EPCC contracts (Petrochemical complexes, LNG Regasification Plant and associated facilities) to continue roll out in 3Q14 after site preparation, Cogeneration Plant and Raw Water contracts have been awarded to ensure PIC will be operational in time (early 2009). To note, there are potential more EPCC works if potential foreign investors commit their final investment decision on RAPID as PIPC is expected to attract RM170bn investment for next 10- 15 years. The EnergyPark Peterborough project is progressing well with financial close expected to be in end of 3Q14. It expects the construction of EnergyPark to start in 4Q14 and contribute in FY17. We estimate Phase 1(18MW or 23% of total 80 MW) to add RM0.39 NAV per share to our target price.

Catalysts

i) Announcement of more RAPID contract win, ii) Financial closing of EnergyPark Peterborough, iii) Strong quarterly earnings due to lower finance cost, iv) Relisting of Borsig to unlock value.

Risks

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

Valuation 

We maintained our BUY call with unchanged 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.

Source: Hong Leong Investment Bank Research- 8 Aug 2014