News

• KNM has to-date accepted the Letter of Award from Norman Process Oils Malaysia Plant Sdn Bhd (“Norman”), to undertake the engineering, procurement, and construction (“EPC”) of the Treated Distillate Aromatic Extract (TDAE) Plant located at Tanjung Langsat Port, Johor amounting to US$43m (equivalent to approximately RM175 mil).

• The TDAE Plant is to produce carcinogen-free (green) rubber process oils for synthetic rubber and tyre industries.

• The duration of the Contract is expected to be for a period of 20 months commencing from an agreed date subject to the execution of a formal contract agreement to be duly signed between the parties. Financial Impact

• Contract is deemed within expectations with the reported win bringing the company’s ytd win to 41% of assumed orderbook replenishment rate of RM800m for FY16.

• Operating margins are expected to be at circa 8%, consistent with its historical performance. This translates into circa RM2.7m operating profit p.a.

• We are hopeful that EPC jobs for the downstream segment would pick up in 2H16 as the sanctioned RAPID projects went through cost rebasing post oil price plunge.

Pros/Cons

• Bio-ethanol project in Thailand is close to completion and expected to commence operations earliest by end September 2016. However, to be conservative, we believe project commencement would be delayed further to next year as the group is still in talks with several potential clients (i.e. petroleum product retailers) in Thailand to commit buying portion of the volume of ethanol to be produced from the plant.

• The group is close to finalizing details for the financing of the Peterborough renewable energy project in UK and expect commencement of facility in end 2017.

Risks

• EPC contract cost overrun, inability in securing Peterborough loan financing.

Forecasts

• Unchanged.

Rating

• Hold

Positives

• Roll out of RAPID EPC contracts.

Negatives

• Possible cost overrun.
• Potentially lower work order on current HUC orderbook.

Valuation

• The stock is maintained at Hold based on unchanged TP of RM0.49 pegged unchanged FY16 11x PER due to uncertainty in its upcoming renewable energy project timing and headwinds in its process equipment business.
• Our TP have not yet factored in value from EnergyPark Peterborough and Thailand’s renewable energy business.

Source: Hong Leong Investment Bank Research - 23 May 2016