PROCESS equipment manufacturer KNM Group Bhd (7164)expects to perform better this year on lower tax rates and higher exploration and production activities.
"We recently spoke to the management of KNM following the breakdown of its proposed takeover offer. We believe that investors have overlooked the business aspect in the last few months after the takeover news first broke off back in February 2010," wrote HWANGDBS Vickers Research Sdn Bhd (HDBSVR) analyst Lee Wee Keat in a note to clients yesterday.
KNM's substantial shareholder and group managing director Lee Swee Eng had recently aborted his proposed offer via Bluefire Capital Group to buy KNM's entire business at RM0.90 per share.
Last year was a bad year for KNM as oil majors held back spending in view of low and volatile oil prices.
"We understand that KNM managed to secure only RM1.5 billion worth of jobs last year, and capacity utilisation was only 65 per cent compared with 80 per cent in 2008.
"(Profit) margins for the jobs secured were also slimmer as intense competition over the modest number of jobs available led competitors to cut prices," he said.
Lee expects margins for the next few quarters to remain sluggish as the company completes jobs secured last year. He estimated that the average completion ranges from 15 to 18 months per project.
"We gather that margins have improved since, but have yet to recover to previous levels."
Lee also said concerns over KNM's orderbook replenishment persists.
"KNM has a RM2.4 billion orderbook, with RM400 million of new contracts secured thus far. This is slow, but we foresee a rise in exploration and production activities in the second half of this year to trigger contract flows."
The group currently has a RM11 billion tender book comprising jobs mostly in the Middle East and Europe.
However, Lee has cut his new wins assumption for KNM to RM1.7 billion from RM1.8 billion previously for the financial year ended December 31 2010 (FY10), based on current tender book and historical hit rate of 15 per cent.
KNM's FY09 audited net profit stood at RM260.6 million after adjusting for the tax incentive, which was granted by the Finance Ministry on April 7 2010 to its subsidiary KNM Process Systems Sdn Bhd for the acquisition of Borsig.
Totalling RM1.4 billion, the tax incentive will apply for a period of four years from 2009.
"We expect a lower tax rate going forward as local operations will be spared from paying taxes. Also, there was no impairment charge for Borsig. Borsig contributed about 45 per cent of total FY09 earnings," said Lee.
The research firms has upgraded KNM to "hold" from "fully valued", but lowered its target price to RM0.60 from RM0.65.
"We expect some overhang in the share price given the EPF's recent heavy selling, but at the current price level, we believe that most of the negatives have been priced in. KNM has also started to buy back its shares.
"We believe KNM's strong RM571.7 million cash balance should support more buyback on share price weakness," said Lee.
Read more: KNM Group expects to perform better this year http://www.btimes.com.my/Current_News/BTIMES/articles/03knm/Article/index_html#ixzz0mvq0ZOgg
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