News

To  proposed  a  renounceable  rights  issue  of  up  to  430.5m shares  on  the  basis  of  1  right  share s  for  every  5  existing shares  together  with  up  to  215m  free  warrants   on  1  free warrant   for  every  2  rights  subscribed.  The  right  issue price  shall  be  fixed  at  a  later  date.  The  proposals  are expected to be completed by  1Q15.

The  free  warrants  come  with  5  years  ex piry  and  exercise price  should  be  higher  than  RM1.00,  minimise  any  potential dilution in near term. Expected to raise minimum of RM232m, of which RM1 16m will be used to repay bank borrowing while the  remaining  for  working  capital  for  RAPID  and  new projects.

Financial Impact

Assuming  i)  right  price  at  RM0.72;  ii)  fund  raising  of RM232m;  iii)  bank  repayment  of  RM116m ;  and  iv)  interest cost saving  of  RM9.3m  based  on  weighted  average  interest rate of 7.96% per annum for the group, basic dilution is about 11%  and  will  reduced  our  TP  from  RM1.35  to  RM1.20. However, we believe the remaining fund used for RAPID and new  projects might mitigate the dilution. To  note, our current earnings  forec asts  have  not  included  UK  Peterborough project. Gross gearing  will further  reduced  from  0.41 to 0.32x.

Comments 

We  are  positive  but  not  surprise  about  this  exercise  as  it strengthens  the  balance  sheet  in  order  to  finance  potential more  contract  wins  from  RAPID  and  well  prepare  for Peterborough project. To note, the proposed right will be  fully underwritten  by its major shareholders  and investment  banks.

KNM’s  share  price  has  corrected  20%  in  Oct  alone  mainly due  to  concern  on  oil  price  plunged  and  global  market correction.  At  current  share  price  of  RM0.745,  KNM  is  only trading  at  8.8x  FY15  P/E  des pite  strong  earnings  growth prospect  (CAGR  of  55%  from  FY14-FY16).  In  our  opinion, without  any  chang e  on the fundamentals,  we believe  the  sell down  is  overdone  and  this  provides  bargain  hunting opportunity  for  investors.   Its   owner  Ir  Lee  Swee  Eng  also shows  his  confident  on  the  company  by   progressively increased  its  share  stake  in  open  market  with  price ranging  from  RM0.69  - RM0.815.

Despite dry newflows for upstream sector in next few months, we  expect  more  EPCC  contracts  from  RAPID.  We understand  KNM  has  been  actively  negotiating  for  few subcontractor  jobs  from  the  refinery  packages  and  bidding EPCC contract for tank farms and other  associated facilities. We expect continue contract newsflow for KNM until 1Q15.

Catalysts 

i) Announcement of more  RAPID contract win(s );

ii)  Financial closing  of  EnergyPark  Peterborough;

iii)  Strong  quarterly earnings  due to lower finance  cost .

Risks

• Fluctuation  in  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. Our TP have not factored in value  from EnergyPark Peterborough  yet.

Despite  weakness  in  oil  price,  we  advise  investors  to  stay invested  and  subscribe  to  the  rights .  KNM  is  one  of  the alpha  stocks  that  will  benefit  from  the  mega  RAPID  project for  the  next  few  years  with  commencement  of  UK Peterborough  project to provide  long term recurring  income.

Source: Hong Leong Investment Bank Research - 20 Oct 2014