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Monday, August 11, 2014

KNM expected to secure RM1b worth of jobs from Rapid (Edge)

KNM Group Bhd
(Aug 8, RM1.07)
Maintain buy with target price of RM1.50:
The refinery and petrochemical integrated development (Rapid) project’s mega packages are finally out. Sinopec Engineering Group Co Ltd has secured a letter of award from Petroliam Nasional Bhd (Petronas) for an engineering, procurement, construction and commissioning (EPCC) contract valued at about US$1.33 billion RM4.27 billion). KNM is one of Sinopec’s selected subcontractors for this package, having been involved in the bidding process with Sinopec.

We believe that KNM’s effective portion of the contract is US$280 million. Works are likely to start in early 2015 and will be carried out over two years.

This is a positive development for KNM. Apart from this Rapid package, we understand that KNM would also have exposure to several other packages.

According to market sources, apart from Sinopec, the other EPCC winners for the other four Rapid-related packages are CITC, Technicas Reunidaf, Petrofac and Toyo.

In total, we expect KNM to secure about US$800 million-US$1 billion worth of jobs from Rapid alone over the next three years (2015 to 2017). We expect subsequent contract flows from Rapid over the next few months to be in favour of KNM.

As a result, we have raised our 2015 and 2016 earnings forecasts by 44% and 40% respectively, taking into account expectations for higher backlog orders (+50% to RM3 billion per annum).

Similar to our other cyclical, order-driven oil and gas stock coverage, we are now adopting the backlog-based valuation method for KNM.

Its orders momentum should drive price performance and this new approach best reflects KNM’s prospects. For this, we have raised our target price to RM1.50 (+50sen), based on 0.7 times enterprise value/backlog multiple for 2015.

The 0.7 times reflects its three-year historical threshold. We have assumed a RM3 billion order backlog for 2015. — Maybank IB Research, Aug 8

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