Stock Name: KNM
Company Name: KNM GROUP BHD
KNM Group Bhd
(Oct 12, RM1.30)
Maintain neutral at RM1.22 with target price of RM1.22: KNM announced yesterday that it has secured a conditional turnkey engineering, procurement, construction and commissioning (EPCC) contract for a waste to energy (WTE) plant worth US$200 million (approximately RM628 million) from Orizon Renewable Energy (Pte) Ltd (ORE), an indirect 51%-owned subsidiary of Octagon Consolidated Bhd. To note, earlier last week KNM was also awarded a RM70 million contract by Octagon to manufacture an advanced thermal gasification reactor.
The WTE plant is a public private partnership project between ORE and the Waste Management Authority of Western Province, an agency under the government of Sri Lanka. The plant, which will be located in Karadiyana, Thumbowila, Kesbewa, Colombo, Sri Lanka, has the capacity to process up to 1,000 tonnes per day of municipal solid waste and generate a minimum of 40MW of electricity.
Should the EPCC contract be finalised, KNM's order backlog is expected to increase to between RM3.5 billion and RM3.8 billion (excluding the RM2.2 billion Peterborough project). We understand that the construction of the WTE plant is expected to start in 2Q12 and be completed in 2Q14.
We understand that ORE has received the government's approval to build-own-operate the WTE plant. The ground-breaking ceremony was held last week. The electricity will be sold to Ceylon Electricity Board, the Sri Lanka state-owned electricity company. Hence, we reckon the government is committed to this project.
However, we are concerned about the accessibility of financing given the fact that Octagon is a highly leveraged company with net debt of RM177 million, equivalent to 2.3 times net gearing. Assuming a funding structure of 60% equity and 40% debt for this project, Octagon is expected to fork out additional RM195 million cash, putting further pressure on its balance sheet. Credit risk for the project owner is also high, in our opinion.
The contract between ORE and KNM is subject to the signing of a definitive agreement, pending the financial close (needs to be secured by December 2011). KNM also revealed in the announcement that one of the risks is that the project may not achieve its financial close. Hence, we are making no change to our forecasts.
We maintain 'neutral' with unchanged target price of RM1.22. Our target price is derived from eight times 2012 price-earnings ratio, which is slightly higher than one standard deviation below its five-year historical multiple of 5.7 times.
Recall that we reduced our earnings forecast by 20% recently, after factoring in the fact that we have now excluded the Peterborough project in our forecasts. Securing the financing for WTE and Peterborough projects are strong re-rating catalysts for KNM. A knee-jerk reaction as a result of this sizeable EPCC contract announcement, which we are generally neutral on, is possible. ' MIDF Research, Oct 12
This article appeared in The Edge Financial Daily, Ocotber 13, 2011.
Company Name: KNM GROUP BHD
| Research House: MIDF | Price Call: HOLD | Target Price: 1.22 |
KNM Group Bhd
(Oct 12, RM1.30)
Maintain neutral at RM1.22 with target price of RM1.22: KNM announced yesterday that it has secured a conditional turnkey engineering, procurement, construction and commissioning (EPCC) contract for a waste to energy (WTE) plant worth US$200 million (approximately RM628 million) from Orizon Renewable Energy (Pte) Ltd (ORE), an indirect 51%-owned subsidiary of Octagon Consolidated Bhd. To note, earlier last week KNM was also awarded a RM70 million contract by Octagon to manufacture an advanced thermal gasification reactor.
The WTE plant is a public private partnership project between ORE and the Waste Management Authority of Western Province, an agency under the government of Sri Lanka. The plant, which will be located in Karadiyana, Thumbowila, Kesbewa, Colombo, Sri Lanka, has the capacity to process up to 1,000 tonnes per day of municipal solid waste and generate a minimum of 40MW of electricity.
Should the EPCC contract be finalised, KNM's order backlog is expected to increase to between RM3.5 billion and RM3.8 billion (excluding the RM2.2 billion Peterborough project). We understand that the construction of the WTE plant is expected to start in 2Q12 and be completed in 2Q14.
We understand that ORE has received the government's approval to build-own-operate the WTE plant. The ground-breaking ceremony was held last week. The electricity will be sold to Ceylon Electricity Board, the Sri Lanka state-owned electricity company. Hence, we reckon the government is committed to this project.
However, we are concerned about the accessibility of financing given the fact that Octagon is a highly leveraged company with net debt of RM177 million, equivalent to 2.3 times net gearing. Assuming a funding structure of 60% equity and 40% debt for this project, Octagon is expected to fork out additional RM195 million cash, putting further pressure on its balance sheet. Credit risk for the project owner is also high, in our opinion.
The contract between ORE and KNM is subject to the signing of a definitive agreement, pending the financial close (needs to be secured by December 2011). KNM also revealed in the announcement that one of the risks is that the project may not achieve its financial close. Hence, we are making no change to our forecasts.
We maintain 'neutral' with unchanged target price of RM1.22. Our target price is derived from eight times 2012 price-earnings ratio, which is slightly higher than one standard deviation below its five-year historical multiple of 5.7 times.
Recall that we reduced our earnings forecast by 20% recently, after factoring in the fact that we have now excluded the Peterborough project in our forecasts. Securing the financing for WTE and Peterborough projects are strong re-rating catalysts for KNM. A knee-jerk reaction as a result of this sizeable EPCC contract announcement, which we are generally neutral on, is possible. ' MIDF Research, Oct 12
This article appeared in The Edge Financial Daily, Ocotber 13, 2011.
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