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2010-12-22

KNM Report From HwangDBS

Christmas comes early
  • Secures GBP450m (c.RM2.2b) power project; RM4.4b in the bag YTD
  • A recovery story tapping on the growing opportunity in domestic and global markets; FY11/12F raised 24%/9%
  • BUY, TP raised to RM3.50 on 15.5x FY11F EPS
Ending the year with a bang. KNM announced that its wholly-owned subsidiary, KNM Process Systems, had secured the GBP450m (c.RM2.2b) EnergyPark Peterborough contract. The 4-year contract entails the development of 80MWe gross capacity energy from biomass and waste recycling centre project in the United Kingdom. This brings contracts secured YTD to RM4.4b with an order book size of RM4.6b, an all-time high.

Earnings to garner momentum in 2011, potential news flow on local jobs in the near term. We expect the recovery in earnings to continue in the next few quarters as the company rides on the higher capacity utilisation and better margin jobs secured post-2009. Going forward, we
expect domestic market to play a crucial role in the company’s recovery story. Near term, we see news flow to come from its latest JV which is targeting potential jobs in East Malaysia. FY11-12F earnings are upgraded by 24% and 9%, respectively, to factor in higher contract wins in 2010 and better margins on new jobs secured. Buy, still a laggard in the O&G space.

We maintain our Buy call on KNM and revise upwards our TP to RM3.50 to reflect the earnings upgrade and higher FY11 PE multiple of 15.5x, based on 15% premium to its historical PE average of 13.5x. We believe the higher valuation is justified supported by the positive sentiment on oil & gas companies, particular on rising domestic jobs. KNM is also poised to benefit from growing global opportunities. KNM is trading at FY11 PE of 11.9x against local and regional peer’s average of 15.4x and 18.6x, respectively.

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