KNM Group Bhd
(Feb 2, 74 sen)
Maintain hold at 73.5 sen, target price at 74 sen: KNM last Friday announced that it was making three separate investments in China. The first is KNM China Pte Ltd, the second, Borsig Valves (China) Pte Ltd and the third, Borsig Compression (China) Pte Ltd.

The group’s purpose of setting up these three subsidiaries was to enable further expansion into China for the manufacturing of Borsig compressors and ball valves as part of the Borsig strategy.

From what we understand, the plan was for Borsig to move out of part of its manufacturing operations to places where operation costs were cheaper.

Initially, KNM talked about bringing production into Malaysia but it appears that the group is choosing China instead as a destination for both valve and manufacturing. KNM had mentioned back in June 2009 of their entry into China for manufacturing but only now it has come into fruition.

To note, Borsig’s ball valves and compressors are patented products and naturally fall into the “high-end” process equipment category.

We believe that we might see some jobs emerge from this venture soon, post investing a little more to build up plants. As always, it is good to see KNM being productive and honing on expanding market share in Asia as well as growing Borsig’s business, diversifying it away from being predominantly European.

The latest order book of the group is now at a relatively steady RM2.2 billion, after falling below the RM2 billion mark over 2009. In terms of bidding, KNM said that it has some RM14 billion of bids of jobs out in the market.

We maintain our hold call on KNM for now. Our target price of 74 sen is based on price-to-earnings (PE) of 12 times pegging FY10 earnings per share (EPS). — ECM Libra Investment Research, Feb 2
This article appeared in The Edge Financial Daily, February 3, 2010.