News

• KNM ann ounced tha t KHH Inf rastructures Sd n Bhd (“KHHI”), a 5 0:50 ow ned joint venture company betw een Ho Hup and KNM had on 22 March 2016, accepted the aw ard of a sub-contract job f rom SINOPEC Eng ine erin g Gro up Malaysia Sdn Bhd (“SEGM”) to un dertake the Work of Civ il and Underground Piping in the RAPID PROJECT – PACKAGE 2 - Area 2, including Process Unit ARDS-1 (Unit 1211), the Buildings 6850-SUB-121 and 6750-FAR-121 for a sum of approximately RM57.8m.

• The scope of supply and w ork of KHHI include general building w orks for electrical substation and f ield auxiliary room, foundat ions, superstructures, internal roads, paving, underground piping, trenches, manholes, pits, basins and related civil w ork.

• The durat ion of the above contract is for 24 months and is expected to commence on 30 March 2016.

Financial Impact

• KNM’s port ion of the contract is w orth RM28.9m. This is the f irst contract secured by the group for 2016.

• Yearly impact of the contract on the gro up ’s EBIT is mo dest at RM1 .2m per annum assuming a conservative 8% EBIT margin.

• The group still has some w ay to go to achieve our year ly RM1bn orderbook replenishment assumpt ion for its process equipment business. Nevertheless, w e believe it is achievable as w e expect a pic kup in contract f low s f rom RAPID in 2H16 as main contractors for RAPID rebase their costs and contract terms.

Pros/Cons

• While impact is minimal, the contract w in is still a positive as it marks the f irst out of other RAPID contracts to be further rolled out throughout the year. According to our channel checks, the addressable market for RAPID process equipment contracts are est imated at RM18bn, indicating huge opportunity of contract replenishment for the group.

• We maintain our view that KNM, being among the largest process equipment manufacturer, should be one of the main benef iciaries of RAPID project. We expect contract f low s to pick up in 2H16 af ter RA PID’s ma in contract ors realigning their cost base amid w eak oil prices w hich have af fected Petronas budget.

• Project execut ion remains key to the prof itability of the contract secured by the group for its process equipment business.

• In addition, the complet ion of acquisition of Th ailan d’s eth ano l business should add RM22m to bottomline in FY16 for Phase 1. Phase 2 w ill potentially double the capacity w ith capex estimation of 50% of Phase 1.

Catalysts

• i) Announcement of more RAPID contract w in(s); ii) Financial closing of EnergyPark Peterborough; iii) Additional contribution f rom Renew able Energy business in Thailand and/or f rom JV w ith Hansol.

Risks

• Fluctuat ion in oil price; Project execut ion ability; Delay in contracts aw ard.

Valuation

• We maintain our BUY call w ith unchanged target price of RM0.67 based on unchanged 11x P/E.
• Our TP has yet to factor in value f rom EnergyPark Peterborough and Thailand’s renew able energy business.

Source: Hong Leong Investment Bank Research - 24 Mar 2016