KNM Group Bhd
(June 14, RM1.91)
Maintain buy at RM1.90 with target price of RM3.35: At the analysts' briefing on Monday, the management remained optimistic of a recovery in 2011. As at May 2011, KNM had secured RM1.5 billion worth of new orders, taking its order backlog to RM5.5 billion. Its tender book remains strong at RM17 billion, which means it is likely to meet our FY11 target order win of RM3 billion given its historical success rate of 20%. We learned of delays at its RM2.2 billion EnergyPark Peterborough project and the management now expects it to commence next month.

The weaker-than-expected 1Q11 earnings were largely due to recognition of low margin jobs secured in FY09 and early FY10. KNM still has RM1 billion worth of old contracts in its backlog, which we expect to be exhausted by FY11. We cut FY11F earnings by 15% because the old projects, which will account for circa 50% of revenue this year, will yield lower margins. However, KNM's prospects remain buoyant, as its large order book will support long-term earnings visibility. Hence, we are retaining our forecasts for FY12.

KNM is currently trading at an attractive valuation of only eight times FY12 EPS, making it one of the cheapest oil and gas stocks in Malaysia. The recent

selldown by investors due to disappointing 1Q11 earnings is excessive. We remain bullish on KNM's long-term prospect and the full impact of normalised margins will be reflected in FY12. We recommend investors to buy on weakness. ' HwangDBS Vickers, June 14


This article appeared in The Edge Financial Daily, June 15, 2011.