-  We upgrade our call on KNM Group from SELL to HOLD as the share price has fallen to our unchanged fair value of RM0.55/share, which is based  on a 20% discount to our adjusted book value estimate of RM0.71/share. 

-  Our adjusted book valuation still excludes the group's RM780mil goodwill arising from the acquisition of BORSIG Beteiligungsverwaltungsgesellschaft mbH (Borsig), but we now have not included any dilution for the 489mil free warrants attached to the 1-for-2 rights issue, which was priced at RM0.40/share. This is because the warrant exercise price has been fixed at RM1.00/share, which is currently out-of-the-money.  

-  KNM's rights issue had been over-subscribed by 31%, which means that the group raised total proceeds of RM196mil. This is a positive development as the rights proceeds will enable the group to avert from defaulting on RM190mil commercial papers/medium term notes, of which a large portion expires soon. 

-  But we still view the group's earnings prospects as challenging given the current global environment and the long-term development of the RAPID project. Even though the group has successfully acquired the GBP25mil (RM124mil) Peterborough land with a UOB credit facility, the project still requires a massive GBP233mil (RM1.2bil) for the first phase involving a 35MW waste-to-energy plant and a larger GBP251mil (RM1.2bil) for Phase 2's additional capacity of 55MW.

-  The group still plans to list its 100%-owned Borsig in Singapore to raise further cash proceeds. But we continue to view the group's indicative valuation of RM1.8bil-RM1.9bil for Borsig may be too high given its FY11 PE valuation of 16x-17x, while the rest of the group's operations are currently suffering losses. As management indicated that Borsig is already operating at almost full plant utilisation, we do not expect its forward earnings growth to be significant given the current global economic environment.

-  As a comparison, SGX-listed Technics Oil & Gas, which engineers and fabricates topside modules, gas compressors and power generators for offshore platforms and FPSOs, currently trades at an FY13F PE of only 9x. 

-  Given KNM's weak balance sheet and losses for its other segments, a more conservative PE valuation of 10x could mean a prospective market valuation of RM1.1bil vs. Borsig's acquisition cost of RM1.7bil (EUR350mil) in 2008. This could mean a potential write-down of RM600mil in FY13F, translating into 37% of KNM's shareholders funds currently.

-  KNM currently trades at an adjusted PBV of 0.7x, which is at the lower range of its 0.7x-1.1x over the past three years.