News

• Proposed acquisition of “ABL Group” which owns a combined 72% stake in Impress Ethanol and 49% stake in Impress Farming for US$24m (or RM88.5m).

• Both companies are based in Thailand and involved in Thailand’s renewable energy ethanol market. Impress Ethanol is involved in the production and sales of fuel grade and industrial grade ethanol while Impress Farming is trading and supply of cassava for bio-ethanol purposes.

• The purchase consideration will be financed by combination of US$12m cash and issuance of new KNM shares. Financial Impact

• We understand that the acquisition will enable KNM to participate in the Thailand renewable energy sector which required constructing and operating a bio-ethanol plant. This will provide recurring income for KNM in the long term.

• Net gearing at only 0.27x and expect to improve further after 1 for 5 right issue completion in April 15 (to note, the proposed right will be fully underwritten by its major shareholders and investment banks), which provide room for expansion.

Comments

• We are positive about this new venture as this will help the company transform from project based earnings to more recurring income. Together with UK Peterborough biomass project, we expect to see significant contribution of income from recurring renewable energy division in the future.

• The propose construction of a bio-ethanol plant is in line with Thailand’s Alternative Energy Development Plan (AEDP- 2012-2021) to target 25% of renewable energy in total energy consumption by 2021 with 9 m litres/day from ethanol (from about 2.6 m litres/day in 2013).

• The main feedstock for bio-ethanol is sugarcane and cassava. There are currently 21 bio-ethanol plants in Thailand with capacity of 4.8 m litres/day.

• The declining global oil price should not markedly affect its business given its focus on the downstream. With the RAPID project proceeding, we expect to see continuous contract newsflow. We understand that KNM has a good chance to secure subcontractor jobs from some refinery package in the near term.

• We also reassured that EnergyPark Peterborough project remain on track with some ground and minor construction works started. It expects to commence contribution in FY17. We estimate Phase 1 (18MW or 23% of total 80 MW) to add RM0.39 NAV per share to our target price.

Forecasts

• Unchanged pending more detail information.

Catalysts

• i) Announcement of more RAPID contract win(s); ii) Financial closing of EnergyPark Peterborough; iii) Stronger 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 RM0.88 based on unchanged 11x FY16 P/E.
• Our TP have not factored in value from EnergyPark Peterborough and Thailand’ renewable energy business yet.

Source: Hong Leong Investment Bank Research - 16 Mar 2015