KNM Group - Secures MYR175m EPC job

Author: kltrader   |   Publish date: Mon, 23 May 2016, 09:57 AM 

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Reiterate BUY and MYR0.80 TP

The EPC job win worth MYR175m from Norman Process Oils is a positive development to its orderbook replenishment for existing operations (process equipment). Nonetheless, the key re-rating catalyst to KNM is the successful remodelling of its business model, from a cyclical to a more secured, recurring based income via its potential exposure to the build, own, operate (BOO) waste-to-energy (WTE) operations in Thailand and UK. This would be realised from as early as 3Q16. BUY.

Jobs replenishment momentum gaining ground

KNM has received a Letter of Award from Norman Process Oils Malaysia Plant Sdn Bhd for the engineering, procurement and construction of the Treated Distillate Aromatic Extract (TDAE) plant at Tanjung Langsat Port, Johor. The contract is valued at MYR175m or USD43m and will take about 20 months to deliver. The TDAE plant is to produce carcinogen-free (green) rubber process oils for synthetic rubber and tyre industries. The new job accounts for 9% of its orders replenishment target of MYR2b p.a.

More to come, stay tuned

We estimate the job to contribute about MYR26m-MYR30m in gross profit, based on a 15%-17% gross margin. While the margin appears to be lower than that for its previous works, this is not unexpected, in light of the cost cutting measures undertaken across the O&G sector, as it operates in a cyclical downcycle. Our earnings estimates are unchanged, having already imputed new job wins.

Business transformation ongoing

Our BUY call and MYR0.80 TP, based on 0.4x EV/ order backlog are maintained. Our forecasts exclude any contribution from the renewable energy (RE) operations from its Thailand and UK projects.
Source: Maybank Research - 23 May 2016