Listing Borsig to expand compressor business. We understand from management that the reason behind the listing of Borsig is to raise funds to expand Borsig's compressor business. Presently, the compressor division is already running at maximum capacity (in three work shifts) and there is a strong order backlog due to the delay in the delivery of the gearbox, a key component to complete the compressor which it outsources from a third party. Hence Borsig intends to internalize the production of the gearbox to reduce the dependency on third party manufacturers. This will require capital expenditure and hence the listing is essential for the growth of the company. We view management's move to tap the equity market for fresh capital as a positive one as KNM is already geared up heavily. In addition, the Peterborough project will incur more debt, which will increase its already-high interest expense further, hurting its bottom-line.

RM1.8bn-RM1.9bn valuation ambitious but possible. During the briefing, management revealed the positive historical financials of Borsig from 2009-2011 (shown in Figures 1 & 2) except for 2011, during which profits were affected by a one-off project, which was erroneously recorded. Based on the data, management aims to list Borsig at an indicative PER of 12-14x forward earnings, which explains the indicative market capitalization of RM1.8bn-RM1.9bn it indicated in its announcement on Bursa Malaysia last week. While Borsig only registered a PAT of some RM60m in 1H12, management believes that it could register a PAT of some RM150m in FYE12 as the company typically does better in the later part of the year. We think that a listing at 12-14x forward earnings would be challenging as it appears to be on the high side versus its regional peers.

Upgrade to TRADING BUY, FV nudged up to RM0.81. We are trimming our FY13 earnings forecast by 4.4%, assuming that Borsig is listed in 3Q13. While the overall prospects look positive (cash injection via rights, listing of Borsig and the Peterborough project finalizing soon), we are lowering our PER from 13x previously to 11x as we do not see any signs of operational improvements in the near term. Despite lowering our PER valuation, our FV is nudged up marginally to RM0.81 (previously RM0.80) as we roll over our valuations to 11x FY13 EPS (previously FY12 EPS).

More orders to Borsig once financing for Peterborough project obtained. We gather that once the financing for the Peterborough project is obtained, this will not only provide KNM with a steady income from 2016-17 onwards but would also improve Borsig's orderbook in the interim as the project requires products produced by the latter. We gather that KNM has secured financial closure for this deal and view this as positive in the long term. Nonetheless, given KNM's poor execution track record, we are not so optimistic on the project being completed on time (within four years) as construction has yet to begin.

Bringing Borsig's expertise to our shores. In tandem with management's ambition to actively participate in Petronas's Refinery & Petrochemical Integrated Development (RAPID) in Pangerang, we gather that management is converting its existing plant in Gebeng, Kuantan into a boiler plant that will be operated using Borsig's technology. As the product and technology is distinctive, we understand that it will not compete with KNM's existing business in Malaysia. Management intends to tender for some RM12bn-RM18bn worth of jobs in RAPID in 2H13 and if successful, these jobs may contribute positively to the company only in FY14.

Source: OSK