PP 7767/09/2010(025354)

9 July 2010

Malaysia Corporate Highlights

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

New s Upda te 9 July 2010

MARKET DATELINE

KNM Group Share Price

Fair Value
:
:
RM0.51
RM0.36
Good, But Not Enough Recom : Underperform
(Maintained)

Table 1 : Investment Statistics (KNM; Code: 8133) Bloomberg: KNMG MK

Core Net Core Net
FYE Turnover profit EPS Growth PER C.EPS* P/CF P/NTA ROE Gearing GDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (x) (%)
2009 1,821.7 150.8 3.8 (55.2) 13.5 - n.m. 10.4 14.8 0.6 3.9
2010f 1,766.7 113.9 2.8 (24.5) 17.9 4.0 18.6 6.6 9.4 0.6 3.9
2011f 1,897.2 144.9 3.6 27.2 14.1 6.0 12.1 4.5 10.3 0.5 3.9
2012f 2,187.6 205.3 5.1 41.7 9.9 7.0 8.7 3.1 12.3 0.4 3.9
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ New contracts. KNM announced that its subsidiaries in Malaysia, Australia Issued Capital (m shares) 4,004.4
Market Cap (RMm) 2,042.2
and Europe had won new contracts worth RM288.8m to fabricate process
Daily Trading Vol (m shs) 34.4
equipment for customers in Venezuela, Russia, Brazil, Australia and US,
52wk Price Range (RM) 0.48-0.905
and to supply labour, tools and consumables for MMHE’s project in
Major Shareholders: (%)
Turkmenistan. 40% of the contract value is from Borsig’s contract to Ir. Lee Swee Eng 24.8
supply primary syngas coolers for the Kemper County Integrated EPF 9.4
Gassification Combined Cycle Project in the US. Acording to the company,
these contracts will contribute positively to FY12/10-12, i.e. spread over
FYE Dec FY10F FY11F FY12F
the next 2½ years.
EPS chg (%) (0.5) (25.5) (21.3)
♦ Good, but not enough. While these contracts should be viewed positively Var to Cons (%) (28.9) (39.7) (26.8)

for KNM and suggests that development projects are still proceeding in
PE Band Chart
various regions, we are concerned that this may not be enough. We note
that the company has already secured RM1bn worth of orders in the
1H2010 (including the just-announced contracts), but still needs to win PER =24x
PER = 18x
another RM1bn in the 2H in order to ensure growth in FY11 revenue. PER = 12x
PER = 6x
♦ 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.

♦ Forecasts cut. We were previously too optimistic on our FY10-12 revenue Relative Performance To FBM KLCI
assumptions, and we have cut our projections by 14%, 23% and 25%
respectively. While we have also adjusted our cost assumptions for the
respective years, our FY11-12 core EPS forecasts are sharply reduced by FBM KLCI

26% and 21% respectively.

♦ Investment case. Accordingly, our fair value is cut to RM0.36 (from KNM Group
RM0.49 previously) based on unchanged 10x FY11 PER. We reiterate our
view that the near-term outlook for the oil and gas industry is uncertain,
and contract flows are unlikely to pick up substantially within the next six
months. Hence, we maintain our Underperform call on the stock.

Yap Huey Chiang

Please read important disclosures at the end of this report. (603) 92802171
yap.huey.chiang@rhb.com.my

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 9 July 2010

Table 2. Earnings Forecasts Table 3. Forecast Assumptions

FYE Dec (RMm) FY09 FY10F FY11F FY12F FYE Dec FY10F FY11F FY12
Turnover 1,821.7 1,766.7 1,897.2 2,187.6 Capacity (tonnes p.a.) 114,100 115,100 133,050
Turnover growth (%) (28.0) (3.0) 7.4 15.3 Capacity utilisation (%) 59.3 59.8 69.1

EBIT 190.1 203.6 240.3 311.6 Average selling price (RM/t) 13.9 14.8 14.8
EBIT margin (%) 10.4 11.5 12.7 14.2
Source: Company data, RHBRI estimates
Net Interest (65.5) (73.4) (73.6) (73.8)
Exceptional items 109.8 - - -

Pretax Profit 234.4 130.2 166.7 237.8

Tax 23.6 39.5 34.0 23.3
Minorities 2.7 3.2 3.2 3.2
Net Profit 260.6 172.9 203.9 264.3
Core Net Profit 150.8 113.9 144.9 205.3

Source: Company data, RHBRI estimates

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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