Company Focus

KNM Group
Bloomberg: KNMG MK | Reuters: KNMP.KL

Malaysia Equity Research PP 11272/04/2011(029388) 13 Jul 2010

HOLD RM0.52 KLCI : 1,326.74 New orders picking up

Price Target : 12-Month RM 0.55)
Reason for Report : Company update
Potential Catalyst: New contract wins
• Order book at year-high of RM2.4b; eyeing several
sizable contracts in SEA and Europe
Analyst
• To take advantage of tax incentives by bringing
Wee Keat Lee +603 2711 2222
weekeat@hwangdbsvickers.com.my more production home
• Maintain Hold; re-rating hinges on contract flows
in 2H10
Price Relative
RM Relative Index

538
Signs of better times? KNM has secured RM1.0b worth
2.30 488
438
of jobs thus far, double what it secured in 1H09. Its current
1.80 388 order book is at the year-high of RM2.4b compared to
RM1.8b in the beginning of the year. Its average selling
338
1.30 288

0.80
238
188
price (ASP) has also improved moderately to close to
0.30 88
138
RM20,000/MT from a low of RM18,500 in 2009 (record
2006 2007 2008 2009 2010 high of RM22,500 in 2008). We understand KNM is eyeing
KNM Group (LHS) Relative KLCI INDEX (RHS) several sizable contracts (>RM100m) in South East Asia and
Europe. We expect accelerating oil & gas activities for the
Forecasts and Valuation rest of this year to drive future demand for process
equipment.
FY Dec (RM m) 2009A 2010F 2011F 2012F

Turnover 1,840 1,903 2,208 2,523 Extending market reach, benefit from tax incentive.
EBITDA 270 346 411 468 KNM may add two more plants to extend its global market
Pre-tax Profit 138 216 276 325 presence. But the investments would be small at c.RM40m
Net Profit 261 190 242 285
Net Pft (Pre Ex.) 261 190 242 285 with a potential JV local partner. KNM expanded its Saudi
EPS (sen) 6.6 4.8 6.1 7.2 Arabia capacity recently, bringing total group capacity to
EPS Pre Ex. (sen) 6.6 4.8 6.1 7.2 157,300MT/year (+6.8%). Meanwhile, works are currently
EPS Gth Pre Ex (%) (25) (27) 27 18 underway to upgrade its Kuantan plant to undertake
Diluted EPS (sen) 6.6 4.8 6.1 7.2
Net DPS (sen) 0.0 0.2 0.3 0.4
manufacturing of BORSIG’s boilers for the global market.
BV Per Share (sen) 51.0 55.8 61.7 68.6 There is also a plan to package BORSIG’s membrane
PE (X) 7.8 10.7 8.4 7.1 equipments in Malaysia to take advantage of the RM1.4b
PE Pre Ex. (X) 7.8 10.7 8.4 7.1 tax incentive and improve overall cost efficiency.
P/Cash Flow (X) 6.2 7.8 6.3 5.4
EV/EBITDA (X) 10.1 7.5 6.1 5.1
Net Div Yield (%) 0.0 0.5 0.6 0.7 Maintain Hold and RM0.55 TP. We are maintaining our
P/Book Value (X) 1.0 0.9 0.8 0.8 earnings assumptions at this juncture, as utilisation rate
Net Debt/Equity (X) 0.3 0.3 0.2 0.1 remains low at 60% and margins are still expected to be
ROAE (%) 13.6 9.0 10.5 11.1 sluggish in 2Q10. Re-rating catalyst for the stock would
Earnings Rev (%): - - - depend on job orders in 2H10. We reiterate our Hold rating
Consensus EPS (sen): 4.7 6.5 7.5 for KNM with a target price of RM0.55, pegged to 9.0x
FY11F PE. The counter is currently trading at 8.4x FY11F PE
ICB Industry : Oil & Gas against the sector’s 8.8x and the region’s 15.0x.
ICB Sector: Oil Equipment; Services & Dist
Principal Business: Process equipment manufacturer At A Glance
Issued Capital (m shrs) 4,004
Source of all data: Company, DBS Vickers, Bloomberg Mkt. Cap (RMm/US$m) 2,062 / 643
Major Shareholders
Inter Merger Sdn Bhd (%) 20.5
Employees Provident Fund (%) 9.6
Free Float (%) 69.9
Avg. Daily Vol.(‘000) 22,405

HWANGDBS
Refer to important disclosures at the end of this report
 Company Focus
KNM Group

Highlights
Signs of better times ahead? KNM has secured RM1.0b
worth of jobs so far, the latest being the five work orders
worth RM288.8m secured by its three wholly-owned
subsidiaries – KNM Process Systems (KNMPS), FBM Hudson
(FBM) and BORSIG (see Fig.1). Comparatively, KNM
managed to secure only c.RM1.5b worth of contracts in
2009. Contract flow has improved (Fig.2) and the latest wins
bring KNM’s current order book to a year-high of RM2.4b
compared to RM1.8b in the beginning of the year. We
excluded the RM400m Verwater contract from our order
book computation because it is currently being put on hold
by the client, who has yet to secure financing for the project.
O&G sector is improving, albeit slowly. We see oil & gas
activities picking up in the second half of the year,
underpinned by stabilising oil prices and improving
demand. The oil & gas and petrochemical industries
typically account for more than half of KNM’s revenue
(65%), and we expect rapid growth in the LNG industry to
continue to drive demand for process equipment going
forward, as evident in the recent works secured. KNM’s
ASP has also improved moderately to close to
RM20,000/MT from a low of RM18,500 in 2009. In 2008,
its ASP was as high as RM22,500. KNM currently has a
RM14b tender book and is eyeing several sizable
contracts (>RM100m) in the South East Asia and
Europe.

Fig.1: List of work orders Still keen to expand. We understand that KNM is looking
Client Subsidiary Project to add two more plants to extend its market reach. It
Prosernat SA KNMPS Supplies molecular sieve currently has 21 plants, three engineering offices and one
absorbers and dry gas dust process technology centre across 14 countries. The two
filters among others, for the
Bariven San Joaquin, Tren IV plants are in Central Asia and South Africa. We expect the
Project in Venezuela. consideration for each plant to be small at c.RM40m, and
KNMPS Supplies skidded GSU (gas potential JVs with local partners would be the most likely
separation units) and SRU scenario in which the company would pursue the
(sulphur removal units) for the
Kharyaga Project in Russia.
expansion. Meanwhile, KNM has also expanded its Saudi
MMHE KNMPS Supplies labour, tools, Arabia capacity, bringing group total capacity to
equipment and consumables to 157,300MT/year (+6.8%).
the Turkmenistan Block 1
Development Project in
Technology transfer to take advantage of tax incentives.
Turkmenistan.
Consorcio CNCC FBM Supplies ACHE (air cooled heat KNM plans to transfer some works done in Europe back to
exchangers) for the RNEST its Kuantan plant to take advantage of the RM1.4b tax
Refinaria do Nordeste Abreu e incentive granted for the acquisition of BORSIG, as well as to
Lima – Petrobras Project in
lower overall production fixed cost. We understand that
Brazil.
Turbine Air FBM Supplies AFC (air fin coolers) to
KNM is spending c.RM25m to set up a plant to manufacture
Systems Ltd the Queensland Curtis LNG BORSIG’s boilers for the global market. The upgrade is
Project in Australia. expected to be completed in Sep 10. There is also a plan to
Mississippi Power BORSIG Supplies primary syngas coolers package BORSIG’s membrane equipments in Malaysia that
Company to the Kemper County
can cater to its Asia Pacific clients.
Integrated Gasification
Combined Cycle Project in US.
Source: Bursa Malaysia, DBS Vickers Recovery signs should be more apparent in the coming
months. We are maintaining our earnings assumptions at
Fig.2: KNM’s contract wins this juncture, as utilisation rate remains low at 60% and
Period Amount Cumulative YTD margins are still expected to be sluggish in 2Q10. Re-rating
(RM’m) (RM’m) catalyst for the stock would depend on job orders in 2H10.
2H09 500 500 However, we are optimistic about the company’s recent
3Q09 500 1,000 share buy-back activities in the market (Fig.3). KNM has a
4Q09 500 1,500 strong cash balance of RM496.7m as at 1Q10. Collectively,
1Q10 400 400 KNM has 76.1m treasury shares (1.9% of paid-up capital)
2Q10 600 1,000
on its balance sheet currently.
Source: Company, DBS Vickers

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 Company Focus
KNM Group

Fig.3: Recent share buy-back Maintain Hold, share price has bottomed out. We reiterate
Date Amount of shares Price paid (RM) our Hold rating for KNM with a target price of RM0.55,
28/04/2010 5,000,000 0.51 pegged to 9.0x FY11F PE. At the current share price level,
6/5/2010 11,000,000 0.51 - 0.52 we believe most of the negatives have been priced in.
26/05/2010 1,000,000 0.485 KNM is currently trading at 8.4x FY11F PE against the
1/6/2010 1,000,000 0.490 - 0.495 sector’s 8.8x and region’s 15.0x.
Source: Bursa Malaysia, DBS Vickers

Fig.4: Local peer comparison

Company Rec Price TP Mkt Cap PE (x) PEG PBV* ROE^ EBIT Net YTD
margin^ margin^
(RM) (RM) (RMm) CY09 CY10 CY11 (%) (%) (%) Chg (%)
Sapura Crest NR 2.20 NR 2,809 16.6 13.2 11.6 1.8 2.0 8.7 10.8 3.4 -11.3
Kencana NR 1.48 NR 2,454 17.4 14.1 12.2 1.6 3.6 27.6 13.8 10.4 3.0
Dialog NR 1.06 NR 2,099 20.0 15.9 14.1 2.3 4.1 19.5 8.7 8.3 12.4
KNM Hold 0.52 0.55 2,062 7.8 10.7 8.4 0.7 1.1 13.6 11.1 14.2 -33.1
Wah Seong Hold 2.23 2.40 1,582 14.0 14.6 13.0 2.2 1.5 11.7 14.4 6.2 -4.3
Boustead Heavy NR 3.70 NR 919 12.1 8.9 7.4 0.8 2.3 19.8 13.4 14.0 -27.5
Alam Maritim Buy 1.80 2.35 915 9.8 8.0 6.8 0.8 1.8 21.4 32.1 26.2 -4.3
Coastal Contract NR 2.30 NR 834 5.1 4.9 4.3 0.6 1.7 35.5 35.9 34.9 17.9
Dayang Enterprise Buy 2.05 3.00 722 16.1 10.7 7.5 0.4 2.1 13.6 25.8 22.1 18.5
Scomi Group NR 0.40 NR 469 41.7 6.5 5.6 0.8 0.4 0.8 7.2 0.5 -10.1
Petra Perdana Hold 1.31 1.25 390 13.3 19.0 8.3 0.2 0.8 5.3 11.5 4.8 -9.7
Perisai Petroleum Buy 0.55 0.70 361 8.5 14.6 13.6 4.0 1.5 13.8 47.4 32.6 0.9
Sealink Int'l NR 0.62 NR 330 5.9 4.6 4.4 2.4 0.8 11.8 35.9 26.0 3.1
Tanjung Offshore Buy 1.25 1.40 327 99.8 9.5 8.1 1.0 1.0 1.0 3.3 0.5 23.8
EPIC NR 1.86 NR 315 7.5 6.8 6.6 3.6 0.9 12.5 29.7 23.0 25.7
Petra Energy NR 1.28 NR 250 17.3 8.5 7.5 1.2 0.8 5.0 7.0 3.0 -22.4
Total 16,837
Simple average 19.6 10.6 8.7 1.5 1.7 13.9 19.3 14.4 -1.1
Weighted average 12.2 10.6 8.8 1.5 1.6
Weighted average (>RM1b mkt cap) 13.4 12.7 10.5 1.6 2.0
*Figures are based on latest quarterly results
^Figures are based on latest financial year
Source: Company, Bloomberg, DBS Vickers

Fig.5: Regional peer comparison

Company Incorp Market Cap PE (x) PBV (x) ROE^ EBIT Margin^ EV/EBITDA
(US$'m) CY10 CY11 CY10 CY11 (%) (%) (x)

Larsen & Toubro India 23,547 24.9 22.8 5.1 4.3 30.5 12.5 17.7
Cameron International USA 8,523 15.4 12.7 2.0 1.8 15.2 15.5 7.8
FMC Technologies USA 7,446 21.3 19.4 6.6 5.2 40.4 12.0 11.3
Doosan Heavy Industries Korea 6,290 27.1 13.3 2.1 1.9 -9.8 6.4 17.2
GEA Group France 4,073 16.9 12.9 2.0 1.6 10.1 6.4 8.4
KNM Group Malaysia 644 10.7 8.4 0.9 0.9 13.6 11.1 7.6
Average 19.4 14.9 3.1 2.6 16.7 10.7 11.7
^Figures are based on latest financial year
Source: Company, Bloomberg, DBS Vickers

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 Company Focus
KNM Group

Income Statement (RM m) Balance Sheet (RM m)

FY Dec 2009A 2010F 2011F 2012F FY Dec 2009A 2010F 2011F 2012F
Turnover 1,840 1,903 2,208 2,523 Net Fixed Assets 836 918 1,038 1,147
Cost of Goods Sold (1,415) (1,423) (1,631) (1,847) Invts in Associates & JVs 2 2 2 2
Gross Profit 424 480 576 676 Other LT Assets 1,848 1,848 1,848 1,848
Other Opng (Exp)/Inc (220) (202) (244) (299) Cash & ST Invts 554 587 609 674
Operating Profit 204 278 332 377 Inventory 107 107 123 139
Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 274 283 329 376
Associates & JV Inc 0 0 0 0 Other Current Assets 503 503 503 503
Net Interest (Exp)/Inc (65) (61) (56) (52) Total Assets 4,122 4,247 4,451 4,687
Exceptional Gain/(Loss) 0 0 0 0
Pre-tax Profit 138 216 276 325 ST Debt 645 645 645 645
Tax 120 (28) (36) (42) Other Current Liab 499 524 557 589
Minority Interest 3 2 2 2 LT Debt 592 503 443 377
Preference Dividend 0 0 0 0 Other LT Liabilities 375 375 375 375
Net Profit 261 190 242 285 Shareholder’s Equity 2,009 2,199 2,432 2,704
Net Profit before Except. 261 190 242 285 Minority Interests 3 1 (1) (3)
EBITDA 270 346 411 468 Total Cap. & Liab. 4,122 4,247 4,451 4,687

Sales Gth (%) (27.3) 3.4 16.0 14.3 Non-Cash Wkg. Capital 385 369 397 429
EBITDA Gth (%) (51.0) 28.2 18.8 13.8 Net Cash/(Debt) (683) (561) (479) (349)
Opg Profit Gth (%) (60.1) 36.1 19.5 13.7
Net Profit Gth (%) (22.5) (27.0) 27.3 17.6
Effective Tax Rate (%) N/A 13.0 13.0 13.0

Cash Flow Statement (RM m) Rates & Ratio

FY Dec 2009A 2010F 2011F 2012F FY Dec 2009A 2010F 2011F 2012F
Pre-Tax Profit 138 216 276 325 Gross Margins (%) 23.1 25.2 26.1 26.8
Dep. & Amort. 67 69 79 91 Opg Profit Margin (%) 11.1 14.6 15.0 15.0
Tax Paid (70) (3) (28) (36) Net Profit Margin (%) 14.2 10.0 11.0 11.3
Assoc. & JV Inc/(loss) 0 0 0 0 ROAE (%) 13.6 9.0 10.5 11.1
Chg in Wkg.Cap. 147 (9) (36) (38) ROA (%) 6.1 4.5 5.6 6.2
Other Operating CF 152 0 0 0 ROCE (%) 5.6 6.6 7.6 8.2
Net Operating CF 434 273 291 342 Div Payout Ratio (%) 0.0 5.0 5.0 5.0
Capital Exp.(net) (84) (150) (200) (200) Net Interest Cover (x) 3.1 4.5 5.9 7.2
Other Invts.(net) 0 0 0 0 Asset Turnover (x) 0.4 0.5 0.5 0.6
Invts in Assoc. & JV (1) 0 0 0 Debtors Turn (avg days) 77.9 53.5 50.6 51.0
Div from Assoc & JV 0 0 0 0 Creditors Turn (avg days) 67.2 45.4 42.6 42.9
Other Investing CF (5) 0 0 0 Inventory Turn (avg days) 27.6 28.8 27.0 27.2
Net Investing CF (90) (150) (200) (200) Current Ratio (x) 1.3 1.3 1.3 1.4
Div Paid (49) 0 (10) (12) Quick Ratio (x) 0.7 0.7 0.8 0.9
Chg in Gross Debt (195) (89) (60) (66) Net Debt/Equity (X) 0.3 0.3 0.2 0.1
Capital Issues 11 0 0 0 Net Debt/Equity ex MI (X) 0.3 0.3 0.2 0.1
Other Financing CF (74) 0 0 0 Capex to Debt (%) 6.8 13.1 18.4 19.6
Net Financing CF (307) (89) (69) (78) Z-Score (X) 2.1 2.5 1.7 1.8
Net Cashflow 38 34 22 65 N. Cash/(Debt)PS (sen) (17.3) (14.2) (12.2) (8.9)
Opg CFPS (sen) 7.3 7.1 8.3 9.6
Free CFPS (sen) 8.9 3.1 2.3 3.6

Quarterly / Interim Income Statement (RM m) Segmental Breakdown / Key Assumptions

FY Dec 2Q2009 3Q2009 4Q2009 1Q2010 FY Dec 2009A 2010F 2011F 2012F
Turnover 439 458 399 373 Key Assumptions
Cost of Goods Sold (360) (416) (460) (362) EBIT margin (%) 14.6 15.0 15.0
Gross Profit 79 42 (62) 11 Capex (RMm) 150.0 200.0 200.0
Other Oper. (Exp)/Inc 0 0 0 0 Tender hit rate (%) 15 15 15
Operating Profit 79 42 (62) 11
Other Non Opg (Exp)/Inc 0 0 0 0
Associates & JV Inc 0 0 0 0
Net Interest (Exp)/Inc (14) (14) (12) (11)
Exceptional Gain/(Loss) 0 0 0 0
Pre-tax Profit 65 29 (75) 0
Tax 5 4 43 40
Minority Interest 2 (1) 1 0
Net Profit 71 32 (31) 40
Net profit bef Except. 71 32 (31) 40
EBITDA 79 42 (62) 11

Sales Gth (%) (16.4) 4.3 (13.0) (6.3)

EBITDA Gth (%) (47.8) (46.5) (247.5) (118.2)
Opg Profit Gth (%) (47.8) (46.4) (246.2) (118.3)
Net Profit Gth (%) (27.5) (55.3) (197.3) (229.9)
Gross Margins (%) 18.0 9.2 (15.5) 3.0
Opg Profit Margins (%) 18.0 9.2 (15.5) 3.0
Net Profit Margins (%) 16.3 7.0 (7.8) 10.8

Source: Company, DBS Vickers

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 Company Focus
KNM Group

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