Maybank Maintain BUY on KNM

KNM exceeds RM2b internal job win target

KNM Group Bhd
(Nov 19, 44 sen)

Maintain buy at RM43.5 sen with target price 55 sen: The RM680 million new order from Lukoil will take KNM’s job wins year-to-date (YTD) to RM2.2 billion, surpassing its RM2 billion internal target for 2010.

This is a positive order book trend and suggests that business is recovering. We are buyers of KNM for its improving fundamentals, inexpensive valuations and because it is a laggard play to the recovering sector.

While interest in this stock may only return when KNM starts to deliver on its earnings, downside is limited as most of the negatives have been priced in.

KNM has entered into a contract with Lukoil Uzbekistan Operating Company (Lukoil) to provide technical documentation, equipment and services for the development of gas condensate fields at Adamtash, Gumbulak and Djarkuduk Yangi Kizilcha in Uzbekistan. It is a two-year contract valued at US$216 million (RM680 million).

We are positive on the development. The recovery in KNM’s order book suggests that the O&G service sector is on the cusp of an early recovery phase, a trend that we have alluded to since early this year.

The Uzbekistan job is expected to deliver a considerably better gross profit margin of 30% (blended) since major engineering works are required. KNM should make RM68 million net profit from this project, based on a 10% net profit margin assumption. This should be reflected in its 2011-2012 financials.

We are keeping our net profit forecasts unchanged, for we have incorporated RM2 billion to RM2.5 billion job wins a year into our forecasts. KNM remains a “buy” with a 55 sen target price (nine times 2011 EPS). It reflects KNM’s near bottom of cycle valuations (below its historical mean). Valuations are also inexpensive against the regional peer average valuations of three times price-to-book and 15  to 24 times PER. — Maybank Investment Bank Bhd Research, Nov 19