News

• KNM proposed to undertake a private placement up to 10% of its issued and paid up share capital.

• The indicative issue price is RM0.55 per share and expected to raise about RM106m. The proceed will be used for repayment of bank borrowing and working capital requirement for various major new projects won and potential additional contracts win from RAPID project. The deal is expected to be completed by 1Q16. Financial Impact

• With assumption of interest saving of RM4.5m (RM51m of the proceed will used to repay bank borrowing), FY16 EPS will be diluted by 5.6%. However, we believe the potential to secure additional contracts will more than offset the dilution.

• Balance sheet remain solid with net gearing expected to reduce from 0.23x to 0.21x, which provides more room for future expansion.

Pros/Cons

• We are not surprised by the private placement given company’s continue focus on strengthening balance sheet to undertake more projects. To note, KNM has secured total 3 contracts worth of RM1bn in 6 months and circa RM2bn worth of EPCC contract since 2H14. The company is tendering RM5bn worth of contracts from RAPID. Our orderbook replenishment assumption target already met, any contract win from RAPID going forward will raise our earnings forecasts.

• We remain positive on its fundamental given ability to replenish its orderbook despite low oil price environment with the support of contract flows from RAPID.

• Together with UK Peterborough, the company will transform from project based earnings to more recurring income, which will be another re-rating catalyst.

• We understand that 2HFY15 earnings might not be exciting mainly due to timing of commencement of EPCC contract. However, we expect this to reverse given significant RAPID related earnings contribution in FY16 and FY17 and potential upside risk to our forecasts (from new contracts, EnergyPark, Thailand renewable energy or JV with Hansol).

Catalysts

• i) Announcement of more RAPID contract win(s); ii) Financial closing of EnergyPark Peterborough; iii) Additional contribution from Renewable Energy business in Thailand and/or from JV with Hansol.

Risks

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

Valuation

• We maintained our BUY call with unchanged target price of RM0.67 based on unchanged 11x P/E. Our TP have not yet factored in value from EnergyPark Peterborough and Thailand’s renewable energy business.

Source: Hong Leong Investment Bank Research - 22 Oct 2015