KNM Group Bhd (Aug 20, RM1.60)
BUY. KNM saw heavy selling pressure on Aug 18, falling 18 sen or 11%. There were talks in the market that KNM's recent acquisition of Borsig would raise operating expenses. Also, with the eventual abortion of their convertible bond issue and the shift to term loans, higher interest would eat into earnings. Nevertheless, we think all is well and accounted for. A quick check with management indicated that things are moving smoothly with Borsig and there will be minimal pressure on cost. As for interest expenses, the group would have roughly RM600 million outstanding from the bridging loan that would be converted into term loan. We expect the interest costs on this loan would be 7% to 8%, which have previously been accounted for.
We have lowered our target prices across our coverage of the oil and gas sector and pegged FY2009 (ending Dec 31) price-earnings multiple to 12 times. Still, ample upside is seen for KNM and our target price of RM1.81 gives an upside of 24%. Thus, the stock's recent price weakness indicates a good buying opportunity. The company's order book continues to be strong at an estimated RM4.4 billion inclusive of the RM463 million contract announced last week. 2QFY2008 results will be announced on Aug 26. — ECM Libra (Aug 19)