KNM Below 50 Cents, A Good Buy ?

Article appear on The Edge Daily.

Kenanga Research is maintaining a buy on KNM Group Bhd, with a target price of RM 1.10 per share, following the latter’s axed agreement to buy Ellimetal NV. KNM yesterday confirmed a report by The Edge Financial Daily that it and Ellimetal NV Belgium had mutually agreed not to proceed with KNM’s proposed acquisition of Ellimetal for € 20 million (RM 92 million).

The stock fell to a low of 49 sen, but closed at 49.5 sen, down three sen from the previous close.

However, KNM said it was in the midst of discussions for a commercial cooperation agreement with Ellimetal NV instead in relation to engineering, construction and delivery of aluminium silos within certain territories.

KNM had reasoned that Ellimetal’s owner and key management team would not be staying in the company after KNM’s takeover for the termination of the proposed acquisition. Under the original agreement, Ellimetal managing director Lamber Geerkens was required to continue serving in the same capacity for two years, while similarly identified key personnel needed to sign a minimum of two years’ service contract with the company from the date of the completion of the acquisition.

“This is a win-win situation where KNM funding requirement is lowered but yet is able to extend its reach and product offering,” Kenanga said in a note yesterday. “We remain positive as KNM will look to consolidate its global reach and work at enhancing the synergistic effects which should be advantageous in the current environment given the group’s ability to value add to its clients more than ever before,” said the research unit.

Kenanga Research said KNM’s acquisition of Brazilian companies HZM Industrial Ltda, HZM Servicos Ltda and HZM S A Industria e Comercio de Equipmentos garnered about RM 5 million in savings due to favourable currency position.

It also said that KNM’s order book of RM 4.3 billion was still intact while its tender book totalled RM 22 billion with oil sand bids at about RM1 billion. However, Kenanga Research is expecting new bids to take longer to materialise given the volatility in crude oil prices and other commodities.

Kenanga noted that KNM’s goodwill impairment exercise from the planned acquisition of Berlin-based process equipment maker Borsig was not complete, with KNM targeting to finalise the exercise by this month. The research house slashed its projections on KNM production by 5% for FY08 and 13% FY09, attributing the reductions to the absence of Ellimetal’s capacity.

Further, Kenanga Research predicted that in 2009, KNM would be impacted by delays in its Canadian workshop phase two as KNM would be guided by the oil sands development in Canada. Kenanga’s net profit forecast for KNM Group stands at RM 341.73 million for FY08 and RM 544.18 million in FY09.