PP 7767/09/2010(025354)

15 April 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

New s Upda te
15 April 2010
MARKET DATELINE

KNM Group Share Price

Fair Value
:
:
RM0.74
RM0.75
Takeover Offer Lapsed Recom : Underperform
(Downgraded)

Table 1 : Investment Statistics (KNM; Code: 7164) Bloomberg: KNMG MK

Net Net
FYE Turnover profit EPS Growth PER C.EPS* P/CF P/NTA ROE Gearing GDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009 2,469.6 150.7 3.8 (55.2) 19.5 (8.0) 27.8 9.9 0.7 2.7
2010f 2,400.3 229.7 5.7 52.4 12.8 6.0 11.1 10.7 12.9 0.6 2.7
2011f 2,710.8 279.1 7.0 21.5 10.5 7.0 11.6 6.0 14.1 0.5 2.7
2012f 3,403.0 392.0 9.8 40.5 7.5 7.0 8.0 3.6 17.4 0.3 2.7
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ BlueFire Capital Group’s acquisition of KNM has lapsed. The

Issued Capital (m shares)
Market Cap(RMm)
4,004.4
2,943.2
company announced that the proposed acquisition by BlueFire Capital
Daily Trading Vol (m shs) 26.4
Group (Bidco) has lapsed given that both parties were unable to reach an 52wk Price Range (RM) 0.49-1.09
agreement on the offer price. Recall on 4 Feb 2010, Bidco proposed a Major Shareholders: (%)
general offer to acquire the remaining stake of 76.3% for RM2.7bn cash. Ir. Lee Swee Eng 23.7
♦ Reasons for the withdrawal. We believe the withdrawal of the offer EPF 7.5
was largely due to KNM’s poor 4QFY09 results as well as some of the Smallcap World Fund 5.7
restrictions that the IRB had imposed on the tax incentive arising from FYE Dec FY10 FY11 FY12
the €350m acquisition of Borsig. Note that 50% of the stake in KNM EPS chg (%) - - -
Process Systems (KPS) must be held by Malaysians during the first year Var to Cons (%) (4.4) (0.4) 39.8
of the acquisition of Borsig and thereafter, to be at least 60% for the
PE Band Chart
following years; and that KPS must hold at least 51% of the equity
interest in Borsig for at least five years from the completion of the Borsig
acquisition. PER = 24x
PER = 18x
PER = 12x
♦ Outlook remains favourable. Notwithstanding the failure of the PER = 6x

management buyout, we highlight that demand for higher-end process

equipment would likely pick up on account of stronger investments in the
non-conventional oil sand projects in Canada stemming from the recovery
of oil price to above US$80 per barrel. Recall that ConocoPhillips-Total
and Suncor Energy Inc have started work on phase 2 of Surmont project Relative Performance To FBM KLCI
and Phase 3 Firebag oil sands project respectively in Canada, which had
been postponed due to the downturn in early 09. KNM Group

♦ Risks to our earnings projection. 1) Higher capacity utilisation arising

from stronger orderbook; and 2) Margin expansion due to cross-selling
and cross-manufacturing of high-end Borsig’s process equipment.
FBM KLCI
♦ Forecasts. No change to our forecasts for now.

♦ Investment case. Nevertheless, we highlight the potential downward

pressure on KNM’s share price in the near term due to the fall-out of the
proposed acquisition. Accordingly, we have revised down our fair value to
RM0.75 (from RM0.90 previously), based on 13x FY10 PER. Hence, we
have downgraded the stock to Underperform (from market perform
previously).

Wong Chin Wai

(603) 92802158
Please read important disclosures at the end of this report. wong.chin.wai@rhb.com.my

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 15 April 2010

Table 2. Earnings Forecasts Table 3. Forecast Assumptions

FYE Dec (RMm) FY09 FY10F FY11F FY12F FYE Dec FY10F FY11F FY12

Turnover 2,469.6 2,400.3 2,710.8 3,403.0 Capacity (tonnes p.a.) 142,680 150,950 160,675
Turnover growth (%) (2.3) (2.8) 12.9 25.5 Capacity utilisation (%) 74.1 78.4 83.5

EBIT 369.0 338.1 394.3 522.8 Average selling price (RM/t) 15.1 16.2 19.1
EBIT margin (%) 14.9 14.1 14.5 15.4
Source: Company data, RHBRI estimates
Net Interest (73.3) (73.4) (73.6) (73.8)
Associates - - - -
Exceptional items - - - -

Pretax Profit 144.5 264.7 320.8 449.1

Tax 23.6 (31.8) (38.5) (53.9)
Effective tax rate (%) (16.3) 12.0 12.0 12.0
Minorities 2.7 (3.2) (3.2) (3.2)
Net Profit 170.7 229.7 279.1 392.0
Core Net Profit 150.7 229.7 279.1 392.0

Source: Company data, RHBRI estimates

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