By Stephanie Jacob
Although KNM has taken a hit as all counters exposed to the oil and gas sector have, its move to increase its recurring income by focusing on renewable energy gives it a catalyst for improvement.
Business model: KNM Group Bhd was listed on Bursa Malaysia in August 2003 and then transferred to the Main Board in September 2005.
According to its website, its core business is in “process plants, modules and operation and maintenance (O&M) equipment, process technologies and engineering, plant services and turnkey systems provider for the oil, gas, petrochemicals, minerals processing, desalination, renewable energy, chemicals, steam generation, power and environment industries”.
The majority of KNM’s customers come from the oil and gas (O&G), petrochemicals, energy and minerals processing companies and engineering companies. It has an international footprint with almost 90% of its revenues coming from its export markets.
Recently, the company announced that it was proposing to undertake a private placement of up to 10% of its issued and paid-up share capital. According to Hong Leong Investment Bank (HLIB), the indicative issue price is 55 sen per share and the exercise is expected to raise about RM106 million.
The research house said the proceeds are likely to be channelled towards repayment of bank borrowings and to fund working capital requirements for the recent projects won, as well as to cover future contract wins.
In June 2015, the company said its strategic plan is to raise its recurring income to 35% of its total income from 2018 onwards by focusing on green energy projects. Key projects include its Peterborough project in the UK worth RM2 billion and a biofuel project in Thailand, which KNM owns 80% and 72% respectively.
The UK project is expected to be an income contribution from the third quarter of 2017 and reports say it could make up 25% of KNM’s bottom line. The Thai based project is expected to begin generating income in 2016.
Shareholders and management: KNM is led by Lee Swee Eng who founded the company in 1990 and has helmed it since. In June 2003, he was appointed group managing director and was redesignated as chief executive officer (CEO) and executive chairman. In April, he relinquished the chairmanship but remains CEO and executive director.
The company went through a rough period during the global financial crisis in 2008 and there are suggestions that Lee and KNM bit off more than they could chew. However, Lee has successfully navigated the company back from the brink and is slowly rebuilding the company. The lesson learnt from the crisis also seems to be helping Lee handle the recent volatility in the O&G sector.
Lee’s wife, Gan Siew Liat, is responsible for the group’s human capital department. She has been with the KNM since its inception and in June 2003, she was appointed as an executive director.
Also on the board is Lee’s brother-in-law, Chew Fook Sin, who is responsible for KNM’s energy, procurement, construction and commissioning projects under the plant and technology division. He joined the group in 1995 and was appointed to the board in June 2003.
Share performance: According to Bloomberg, KNM has been trading in a 52-week range of 38 sen to 77 sen. The group has a market capitalisation of RM1.01 billion as of Nov 6, 2015.
It has a one-year return rate of -30.16% and therefore has underperformed the FBM KLCI which has a return rate of -4.93%.
According to Reuters, the group has a beta coefficient of 1.83, and is therefore trading above the overall market volatility. A value of 1 reflects the average volatility of the stock market.
What analysts think: The three research houses monitored by KINIBIZ are unanimous in the “buy” rating of KNM with a target price range of between 62 sen and RM1 per share.
Analysts believe that the two key revenue sources for the group will come from any job it secures from the Petronas’ Refinery and Petrochemical Integrated Development (RAPID) project and from incomes it generates via renewable energy projects such as the ones in the UK and Thailand.
Earnings forecast:
StockStalk: Like all other companies exposed to the current fluctuations of the O&G market, KNM has seen its share price take a hit over the past year. Nonetheless, because it also provides services to a diversified range of sectors, it has perhaps not been hit as hard.
Its push towards increasing the contribution of its recurring income via focusing on renewable energy projects is promising. KNM has already made good progress with jobs it has secured this year. According to analysts, it has a strong order book which should keep it busy for the next several years.
Furthermore, although the number of O&G jobs has fallen since the oil price plunge, it appears that the stream of jobs coming from Petronas’ RAPID project will continue, and analysts opined that KNM is in a good position to secure a share of them.
Investors interested in a stock with some exposure to the O&G sector but with a foot in other sectors as well can consider KNM as an option. It closed trading on Nov 6, 2015 at 55 sen which is lower than analysts’ target price of between 62 sen and RM1, and this offers some decent upside.
A further point to note is that HLIB’s target price of 67 sen has not yet taken into account the UK and Thai renewable energy jobs, while MIDF’s target price of 62 sen represents a slight discount to KNM’s historical price-earnings ratio.
One point of caution will be its exposure to the O&G sector due to concerns over further significant price volatility which may affect the flow of jobs.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words, let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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