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Thursday, July 3, 2014

HLIB starts KNM at 'buy' (Edge)

Target Price: RM1.35

HLIB Research is initiating coverage on KNM Group with a target price of RM1.35 based on 16 times financial year ending Dec 31, 2015 (FY15) price-to-earnings, which is higher than its peers’ average of 14 to 15 times due to its strong earnings prospects.

According to the research house, the company’s potential to benefit from Petronas’ Refinery and Petrochemical Integrated Development project is a major catalyst.

“With assumption of 12% market share, we expect KNM to bag a total of RM2.2bil in contracts or RM540 per annum based on contract duration of four years,” the research unit said.

It said EnergyPark Peterborough was a game changer for KNM and that phase one of the total 80 megawatts would add 39 sen to its target price.

“With the Europe economy improving and healthier balance sheet due to loan refinancing, KNM is a step closer to achieve financial closure,” HLIB Research added.

It said construction of EnergyPark was expected to start in the fourth quarter of 2014 with contribution anticipated in FY17.

By assuming project internal rate of return of 13%, interest rate of 4% and 80% equity stake, the research house expected phase 1 (23% of total) to generate around RM40mil to the company’s bottomline.

HLIB Research also said KNM’s unit, Borsig, stood to benefit from increased spending from oil and gas majors as economic recovery in the euro zone gained traction.

“From the recently secured 220 million euros loan facility, 160 million euros will be allocated for future working capital.

“This will provide the war chest for future potential contracts.”

The research house said the potential relisting of Borsig in next few years might give better value to KNM.

HLIB forecast its net profit to grow at compounded annual growth rate of 74% from FY13 to FY16 as earnings before interest, tax, depreciation and amortisation margin improve from 10% to 11.7% due to lower financing costs and disposal of loss-making Brazil-based business.

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