Random Ztocks Charts MUHIBBAH KNM

KNM Group Berhad (RM0.36) >>> BUY >>> Target PriceRM0.56 (55.6%)
􀂃 Subsequent to KNM’s analyst briefing yesterday, we have cut our FY09 and FY10 profit forecasts further by 22% after lowering our orderbook assumption to RM1.8bn and RM1.5bn respectively. We have also increased our effective tax rate to 18% for both years after the company indicated that approval for its tax incentive following the acquisition of Borsig still pending. Management also have indicated average selling prices have gone
down by 10% to 15% but expects profit margin to remain stable.

􀂃 In arriving at the sales forecast for both years, we have assumed that the Group will recognize about 70% of its current orderbook of RM3.9bn in FY09 while the balance 30% in FY10. New orders in each year are expected to contribute 30% to sales while the balance 70% will be carried forward into next year.

􀂃 The management reiterated that it has not seen any cancellation in orders for the current orderbook and whatever that needs to be cancelled has already been done with (such as the C$70mn Canadian contract). This is so as orders cannot be cancelled once the work has started and at the worst case it could be delayed.

Borsig Acquisition Is Not Bad After All
􀂃 Management still hopes to benefit from cross selling Borsig’s products in other countries while offloading some high-end contracts to Malaysia as Borsig’s capacity is fully booked for the next 12 months. Borsig’s orderbook and tenderbook stand at RM1.2bn and RM1.8bn compared to total figure of RM3.9bn and RM18bn respectively.

􀂃 For instance, Borsig’s products that can be sold in other markets are membranes products, compressors and ball valves. Its membrane technology has already been accepted in China market and it is currently looking for partners to produce ball valves either in China or Malaysia.

􀂃 Besides, as Borsig outsource about 30% of its requirements, KNM intends to retain this business within the group by beefing up the capability of its Malaysian operation in the next six months. By doing this it can fully utilize current facilities where the group utilization stood at 80% in FY08 and management expects it to fall to 76% in FY09.

􀂃 Management indicated that receivables shot up 236% to RM705mn due to consolidation of Borsig’s earnings and the latter’s receivables accounted for 24% as it gave advances to suppliers but its receivable days was healthy at 36 days.

New Orders Are Expected to Slowdown
􀂃 We believe the inflow of fresh orders will taper off in FY09 as the Group only secured RM300mn worth of orders in the last two months. These orders are high-end in nature and were secured by its Italian and German operations.

􀂃 Apparently the Middle-East and North Africa are the two regions that are still experiencing strong growth and management expects this trend to continue. Canada and the US have seen slowdown while activities in Asia are deemed to be stable.

􀂃 It is rebidding for some LNG contract in Australia and the results will be known in 2Q. Besides, it is also sees strong activities in gold mining operation and expects new opportunities in Alaska when one of its customers develops a gold mine there. It already has expertise in producing processing equipments for such projects like the autoclave for the gold refinery projecting Dominican Republic. Valuation

􀂃 Maintain Buy with a target price of RM0.56 as we have lowered the PER discount to 10% on FY09 target PER of 6x after imputing a lower orderbook in the next two FYs.

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