Analysts: Short-term upside to KNM

KUALA LUMPUR: KNM Group Bhd's shares shot up by 6.1 per cent yesterday after the oil and gas services provider announced plans to list its German unit, Borsig on the Singapore Stock Exchange next year.

"We understand that KNM expects the listing to be launched in mid-2013," an analyst from RHB Research said.

The shares rose by 4 sen to close at 70 sen, off an intra-day high of 71 sen.

Analysts say there is short-term upside to KNM's share price given the positive news flow, but over the long-term, they expect weak sentiment towards the shares to prevail.

Most had either a "hold" or a "sell" call on the stock.

KNM, which reported a net loss of RM83.4 million last year, had said late Thursday in a stock exchange filing that the indicative valuation for Borsig was between RM1.8 billion and RM1.9 billion.

This is just a slight premium to the RM1.7 billion cash that KNM paid to acquire 100 per cent of Borsig in 2008.

OSK noted that if KNM disposes off a stake of between 25 per cent and 30 per cent in Borsig, the listing exercise could fetch it up to RM540 million based on that valuation.

"Hence, the company would turn net cash in the financial year 2013 and the exercise should reduce the intangible assets on KNM's balance sheet as we believe bulk of it was made up of the Borsig acquisition. (It's) positive for the share price in the short term," it said.

OSK has put its recommendation and fair value for KNM's stock under review pending further updates from the group. It had previously pegged a "neutral" call and fair value of 80 sen.

KNM bought Borsig in 2008 to be able to move up the process equipment value chain and get access to the latter's client base in Europe.

It is understood to want to list Borsig to raise capital to be able to further expand the latter's operations. As it stands now, Borsig is responsible for the majority of KNM's high gross margin contracts.

"On top of the new shares, we expect KNM to sell some of its shares in Borsig to raise capital for itself, given its large debt of RM1.14 billion currently," RHB Research said.

However, KNM isn't expected to divest too much of Borsig given that the latter is where it derives all its high-margin projects. Borsig has been KNM's core earnings generator, with net profit of between RM112 million and RM141 million a year over the past three years.

RHB believes KNM may own 70 per cent of Borsig post-listing. It maintained a "market perform" call on KNM, with a fair value of 74 sen.

Maybank Investment Bank Research said the proceeds from the listing would be timely to fund the equity portion of KNM's waste-to-energy power plant venture in Peterborough, the UK.

The build-own-operate project, which will cost about RM2.1 billion, should commence construction in 2013.

It said the Peterborough project, if executed well, would provide KNM with a steady income from 2016 and transform its currently purely cyclical business model.

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