Stock Name: KNM
Company Name: KNM GROUP BHD
Company Name: KNM GROUP BHD
| Research House: AMMB | Price Call: SELL | Target Price: 0.75 |
' We maintain SELL on KNM Group with an unchanged fair valueof RM0.75/share pegged to an FY12F PE of 10x ' a 30% discount to the oil &gas sector's 15x.
' KNM paid RM0.3mil (GBP65,000) to extend the completion ofthe proposed acquisition of a 55-acre vacant development land in Storey's BarRoad, Peterborough, England by one month from 6 June 2012 to 6 July 2012.Recall that the group had earlier in January this year paid an exclusivity feeof GBP500,000 (RM2mil) to reserve the land for its proposed GBP25mil (RM120mil)purchase from Poplar Holdings Ltd (Poplar).
' The land is registered under Poplar's wholly-owned PoplarInvestments Ltd, which is based on the Isle of Man tax-haven. This fee is only refundable when Poplar isunable to execute the sale due to 'legal or other circumstances beyond itsreasonable control'. This project, which was announced back in December 2010,was set up by local businessmen who were granted consent for this project bythe UK Government's Department for Energy and Climate Change (DECC) in November2009. The concessionaire had earlier attempted to secure a bond to finance thisproject but subsequently sought a US-based investment fund, which also appearsto be unsuccessful.
' With the Peterborough land ownership, we understand thatKNM could possibly end up with an 80% stake (with the balance held by UK-basedsponsors) in this waste-to-energy concession, which could cost up to GBP600mil(RM2.9bil), if the group could secure external borrowings. Additionally, thereis also a possibility that KNM could end up with a 51%-stake in the separateUS$248mil (RM760mil) waste-to-energy 40MW plasma gasification facility in SriLanka in a joint venture with Octagon Consolidated.
' We view these developments negatively as the huge capitalexpenditure will likely elevate the group's current net gearing level of 0.5xto a worrisome 2.8x, unless other investors dilute KNM's equity stakes in theseprojects to an associate level. Currently, KNM is still sourcing for financingfor both projects.
' KNM's current order book stands at RM5.8bil, with neworders secured up to RM1.8bil for this year and tendering up to RM18bilpotential orders. But as noted in our past reports, over half of the group'sorder book does not have clear visibility in commencement.
' Normalising tax rates, KNM currently trades at a priceyFY12F PE of 30x, way above the oil & gas sector's. This is unjustifiedgiven KNM's persistently poor quarterly earnings delivery.
Source: AmeSecurities
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