Wednesday, April 29, 2009

KNM to see re-rating, says HLG Research

HLG Research has reiterated its buy call on KNM Group Bhd, as the replenishment of

the company’s order book would pick up in the second half (2H) of the year, and given that its share price is still at a discount to its peers.

The research house said KNM is tendering for RM18 billion new jobs, versus RM22 billion last year, and has a historical win rate of 25%. In the first quarter (1Q), KNM secured RM300 million new orders, down from an average of RM1 billion new orders per quarter in financial year 2008 (FY08).

“After a quiet 1Q09 as most clients conducted a re-tendering exercise, we think job flows will pick up in 2H09. However, new orders will only have impact on FY10 and FY11 earnings. Client re-tendering will take up to six months to award, and we expect KNM to re-rate ahead of stronger news flow in 2H09,” it said in a research report yesterday.

KNM Group has an outstanding order book of RM3.9 billion, of which 42% is from Borsig and the balance from other business units. “Management expect to recognise 60% to 70% of its outstanding order book in FY09. On our earnings model, we have assumed RM2.9 billion revenue for FY09, or 74% of current order book,” HLG Research said.

However, the research house had lowered its FY09 net profit forecast for KNM by 23% to RM381 million, due to lower margins from mid- and low-end segment, as well as higher amortisation of intangible assets from Borsig deal amounting to RM40 million.

As for KNM’s FY10 and FY11 earnings, it had raised its projections to RM333 million and RM480 million, respectively, on assumption of higher new orders.

“On December 2008 balance sheet, KNM has net debt of RM915 million, implying a net gearing of 0.5 times. On our estimate, after the repaying the first installment of its term loan (RM117 million) and RM15 million for its ICP/MTN in 2009, net gearing will fall to 0.3 times by end-2009,” it said.

HLG Research noted that KNM’s share price had risen 69% since it upgraded KNM’s rating on March 17. Meanwhile, the share prices of KNM’s global peers have risen by 50% to 60% since the beginning of April, it added.

The research house had raised its price target for KNM to 75 sen from 46 sen, based on discounted cash flow on 10% weighted average cost of capital (WACC) using higher sustainable order book replenishment of RM2.8 billion (versus RM1.5 billion previously).

“At our price target, KNM is valued at PE of 7.8 times for FY09 and 8.9 times for FY10 and EV/Ebitda (enterprise value over earnings before interest, taxes, depreciation and amortisation) of 6.3 times for FY09 and 6.7 times for FY10,” it added.

KNM closed at 55 sen yesterday, down 2.5 sen.

Written by Joy Lee
Tuesday, 28 April 2009 14:06


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