KNM Group – Weathering a Storm

December 10, 2008 at 7:34 am Leave a comment

• A realistic view. KNM, during last week’s 9M08 analysts briefing came across to us as forthright as they have ever been. Given the change in the global scenario over the past few months and the despairing fall of oil prices, and their own share price, the group painted to us a realistic view of the coming 24 months and even refused the issue of a 2010 management forecast given uncertainties.
• Canadian ops to take it slow. As suspected, the Group’s Canadian facilities will be facing a setback as current oil prices are vicariously close to the production costs of oil sands. In view of this KNM plans to push back expansion of the Canadian plant to 2010 and during 2009, the Group will go slow on roll out of products in the region given the shaky standing of customer profits. We had previously tuned down utilisation numbers from Canada in expectation of this.
• Elimetal likely a no go. Besides that, the Group said that they would most likely not be going ahead with the Elimetal purchase due to unsatisfactory due diligence. It saves KNM some EUR20m and would tune down FY09 numbers but only slightly. Removal of earnings from our
FY09 numbers make a minimal dent of <5% to bottom-line. But this is offset by increase in capacity in Indonesia during 2009.
• Slashing 2010 numbers by 16%. Taking a conservative view. KNM reported a still robust RM4.3bn orderbook during the briefing and an impressive tender book of RM22bn. Of that amount, notes the group, only RM1bn is for unconventional oil developments. The concern
going forward will be that, while orders will not be cancelled, they could stand a chance of being renegotiated similar to what Saudi Aramco is doing currently. Hence, smaller values can be expected going forward, especially into 2010 where we tuned down ASP from RM20,000 per MT to RM19,000 per MT and lowered utilisation to 84% from 87% before. Most unconventional oil developments would look to downsizing projects currently as well as easing rollout plans given vulnerable profitability hence eliminating a large pool of jobs to bit for. Rest assured though, the
conventional oil sources would continue to see need for expansion. One project the group hopes to snag in the near term is gas processing (capitalising on their JV with Prosenat) for the Kimanis project. Contract values however were not disclosed.
• Maintain HOLD. TP: RM0.80. With additional uncertainties now in the Group’s forward numbers along with the goodwill on the group’s balance sheet and likely more share price volatility to ensue, we maintain our Hold call and still note that despite downgrades, much negativity appears to already be in the price. Minor changes to FY09 earnings bring TP down to RM0.80 from RM0.85 before.

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