(Oct 4, 50 sen)
Upgrade to buy at 46 sen with target price of 55 sen: Activities are picking up in the global O&G industry (including petrochemical). In the Middle East alone, an estimated US$60 billion (RM185 million) has been allocated to develop the industry over the next four or five years.
We also see oil majors raising funds for exploration and development as in Petrobras’ recent share sale. On the local front, Petronas has kicked off its development plans with the recent award of the Sabah oil & gas terminal project.
Other projects in the pipeline that could potentially benefit KNM include the US$700 million LNG regassification plant, and development of marginal fields.
From a low of RM11 billion as at end-2009, KNM’s tender book size has grown to RM16 billion currently, reinforcing our view of an improving industry outlook. We understand that KNM has had about a 20% hit rate on jobs it bid for.
And as it is on track to secure RM2 billion worth of jobs this year (on a tender book size of RM11 billion), KNM could be carrying over a backlog of over RM3 billion into 2012, implying strong earnings growth and clear visibility with 1.7 times book-to-bill ratio.
We upgrade KNM to “buy” premised on our belief that increasing activities on the global front will benefit KNM significantly in terms of contract awards. However, our FY10/11F earnings are cut by 22% to 29% to reflect sluggish margins ahead, below consensus. Our 55 sen target price is unchanged despite adjusting for a higher PER multiple of 12.5 times to reflect an improving industry outlook. At the current price, KNM is trading at attractive FY11 and FY12 PER of 10 times and seven times, respectively.
Comparatively, local (more than RM1 billion market cap) and regional peers are trading at FY11 PER of 12 times and 17 times, respectively. — HwangDBS Vickers Research, Oct 4
This article appeared on the Live it! page, The Edge Financial Daily, October 5, 2010.
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