Friday, September 18, 2009

OSK upgrade KNM Group TP RM1.060

KNM announced yesterday that it has invested in a JV company, Verwater, which hassecured a EUR220m (RM1.1bn) job to build an oil storage terminal. Also, at ourrecent meeting with KNM’s management, we gathered that the group would besecuring more business, especially after its customers have obtained financing fortheir O&G projects. We believe KNM would soon get some jobs from Technip to buildthe new Jubail refinery. The group is also well positioned to participate in the Gorgonand Papua New Guinea LNG plants, which could each contribute a few hundredmillion US$ in contract value. Maintain Buy with upgraded TP of RM1.06.

A hint of more business. Recently, we met up with KNM’s management and gather that it would be awardedsome new contracts anytime now. We understand that the group is close to getting a few sizeable contractsalthough their actual award would depend on its customers’ success in getting funding for the O&G projects.Once these customers obtain the green light from their banks, KNM’s orderbook replenishment would receive abig boost since the negotiations on some of the contracts are in the final stage of negotiations. Althoughmanagement has not provided guidance on the contracts’ potential value, we believe these could be worthmore than RM2.0bn.

May benefit from Technip’s job award from Saudi Aramco. In July 2009, Technip won the award for 2major turnkey contracts from Saudi Aramco Total Refining and Petrochemical Company (a JV companybetween Saudi Aramco & Total) to build a refinery at the Jubail industrial area in Saudi Arabia. We gather thatthe contract value is US$4bn-US$5bn, which we believe should benefit KNM as it stands to secure a portion ofthe jobs given its more than 18-year business relationship with Technip, which is also one of the group’slongest standing customers. The projects’ work scope encompassing engineering, procurement andconstruction would involve some of KNM’s process equipment.

Gorgon LNG plant could be another boost for KNM. In our Sept 15, ’09 sector news flash, we cited reportsthat Chevron announced that the Gorgon gas project has been approved and will be developed off northwestAustralia. We understand from KNM’s management that it is also bidding for the LNG plant project. The groupis bidding for a few hundred million US$ worth of jobs and expects to know the outcome of its bids byDecember 2009. Apart from Gorgon, KNM is also bidding for a few hundred million US$ worth of jobs for thePapua New Guinea LNG plants, and expects to the results to be announced in 1H10.

An early beneficiary of a revival in oil sands. With the price of crude oil building a new base at US$70/barrellevel, it would be a matter of time before oil sands projects, which were abandoned earlier owing tounfavourable oil price, are revived. We believe KNM would be one of the early beneficiaries given that: 1) it hasthe technology to extract oil from oil sands, and 2) it has the ready infrastructure, having set up a plant inEdmonton, Canada with a capacity of 10k tonnes, which can be increased to 30k tonnes when the need arises.

Upgrading FY10 earnings forecast by 4% to incorporate the oil storage terminal job. Our upgrade isminimal given that we have earlier factored in some job replenishment for the company as we believe 2010would give a better outlook to the company.

Maintain Buy. We have also upgraded our target price to RM1.06 from RM1.01, based on the existing PER of10x FY10 EPS. Going forward, we believe there would be an upward re-rating on the stock because: 1) KNM islikely to get a portion of its tenders once its customers secure the financing for their O&G projects; 2) the globaleconomy is on the recovery track, which will boost demand for O&G and fuel demand for its processequipment when new projects commence; 3) financial institutions would be more willing to lend money to O&Gcompanies once the global economic picture clears; 4) crude oil price is progressively building a new base atUS$70/barrel, which makes O&G projects more commercially viable to carry out, such as oil sands projects,and 5) KNM is a main beneficiary of the global economic recovery, thanks to its global presence and broadcustomer base. Finally, we also expect its orderbook to surge to RM3.2bn (from RM2.7bn) on factoring in thisoil storage terminal job.