At KNM’s analyst briefing last Friday, management guided for lower earnings for FY08-09. Also, the company is no longer looking at the acquisition of Ellimetal as the latter’s management would not want to stay with the company after the acquisition. There was also potential delay in oil sand projects by its customers due to the low crude oil price. Finally, Borsig’s goodwill impairment result is expected to be out by end December ‘08.
Maintain Trading Buy. Our target price for KNM is RM1.08 based on a PER of 7x FY09 earnings. Despite the potential slowdown in global O&G activities, KNM is still supported by its strong orderbook of RM4.3bn and tenderbook of RM22bn. Out of this total, KNM’s portion is about 50% while Borsig and KNM’s other smaller subsidiary make up the balance 30% and 20% respectively.
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