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2009-08-01

KNM Clinches New Project With Value US$220m

Clinches new US$220m project
  1. KNM has secured a US$220m EPCC contract with a 5- year concession in Republic of Chad, Africa
  2. Expect more projects to flow through given the stronger crude oil price
  3. Best proxy for Malaysia oil & gas play; reiterate Buy with TP of RM1.10
US$220m EPCC project and 5-year concession at Republic of Chad. KNM announced yesterday that it had entered into a MOA to form a 60:40 JV with the National Oil Corporation of Chad to develop Sedigi Oilfield in Chad, Africa. KNM will secure a US$220 (RM774m) EPCC contract
from the JV, and the JV will be granted a 5-year concession to operate and maintain the production facilities that include O&G pipelines, LPG processing & bottling plant, and
a 30MW gas power plant.

Expect more project to flow through. We expect more project to flow through for KNM given the higher crude oil price. EBIT margin for the EPCC work for this project is estimated at 15% with EBIT contribution at RM116m. There is no change to our FY09-11F earnings as the project
accounts for part of our FY09F RM1.2b new wins assumption. We expect every RM100m new win to raise KNM’s FY09F/10F net profit by 1% and 4%, respectively.

Concession cushions KNM’s cyclical earnings base. KNM’s investment sum has not been finalized, but we believe funding is likely to come from new borrowing. KNM’s net gearing of 0.5x as at 1Q09 is adequate to fund new projects. The recurrent concession earnings will help to
diversify KNM’s cyclical earnings base and provide a new source of stable revenue for the group going forward.

Maintain Buy. We maintain our Buy call and target price of RM1.10 based on 10x FY10F PE, which is its mid-cycle valuation. KNM is now trading at attractive 8x FY10F PE against local and regional averages of 9x and 15x. It is the best proxy for a Malaysian oil & gas play given its high share price correlation to crude oil price of 0.9x.

Report from HWangDBS

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