KNM: Some comments from brokers

So as expected, KNM says that it was unaware of the cause of the unusual market activity in the company's shares yesterday. Today, it shares hit the limit down price of 39 sen and managed to climb back at 68.5 sen at the closing bell. According to Bloomberg, today's intraday plunge defies brokers expectation. I believe we will not be able to know the real reasons why there is such a plunge in the first place despite many reasons were offered. I even heard that the selling was initiated by margin calls of a major shareholder in the company. Looks like it will only be hear-say, and will remained so. Do I dare to venture back into this badly beaten stock? Yes, but I believe it is better to let the dust settled first before going in, although the price may not always work in our favour but that is the cost for "assurance". Just my view only. Most analysts maintained their "Buy" call on this stock. Of 19 analyst ratings on KNM in the past 12 months, all are a ``buy,'' Here is one particular research report on KNM by AmResearch today, if you do not have not seen it yet.

KNM Group announced that the acceptance of an offer for a 3-year EUR150mil (RM705mil) term loan facility from Malayan Banking (Maybank) on 15 October 2008 to refinance its outstanding bridging loan from Maybank which was used for the EUR350mil (RM1.67bil) acquisition of Borsig Beteiligungsverwaltunsgeselschaft mbH (Borsig). The new term loan is expected to replace the bridging loan, maturing in June 2009, early next year upon completion of loan documentation. Recall that the bridging loan was issued by Maybank for the acquisition which was completed on 6 June 2008. KNM later paid off EUR200mil of the original bridging loan from proceeds raised from a 1-for-3 rights issue at RM4.00/share in June this year.

We understand that the new term facility was offered at cost of funds plus a spread of 2.25%.
With one-year LIBOR at 6.4%, we understand that the interest rate charged could amount to 7.5%-8%. This is within management’s guidance of 8.5%, which is higher than the original bridging loan interest of 5.5%. This translates to an additional interest of RM25mil of FY09F earnings.

KNM’s share price plunged 24% yesterday to 69 sen on concerns of an inability to raise a refinancing package on the bridging loan, rumoured margin calls, customers’ deteriorating balance sheet health due to the global financial crisis and mass dumping of foreign investors. In a reply to the Securities Commission, KNM stated that “the Company is not aware of any other possible explanation to account for the unusual market activity” other than the new term loan.

KNM’s management affirmed that its current order book of RM4.7bil (1.3x FY09F revenues) is still healthy with no indication of any cancellation of contractual agreements. Given that prospects for the global oil & gas industry remain bouyant on crude oil prices of US$75/barrel currently, KNM’s fundamentals appear intact with this refinancing facility, supported by a comfortable net gearing of 0.4x as at 30 June 2008 and reasonable FY09F interest cover of 13.6x.

We maintain our FY09-10F earnings forecasts, which are 14%-19% below management’s guidance. We reiterate our BUY call given the attractive FY09F PE of 4.7x for a rapidly expanding global process equipment manufacturer underpinned by a good track record. However, as equity risk ratings have risen on the back of a possible global recession, we have cut our target FY09F PE from 18x to 10x, translating to a lower target price of RM1.48/share from RM2.66/share previously.

* Aseambankers on KNM: (the current price) offers opportunities to accumulate a "blue-chip oil and gas counter" which trades at a compelling 4X 2009 PER. It believes the sell down was mainly foreign selling and related to funding and other "old issues" which have already been addressed. TP=RM1.50.

* Bloomberg: South Korea's won slumped to USD1: 1,373 won today after S&P's said banks may struggle to refinance their debts. The index and others around Asia tumbles again after a near 8% fall in the Dow overnight. Looks like the "Day and Night Scare" phenomenon is here again.

* These are BNM's latest economic estimates: 2008 GDP 5.5%, 2009: 4%

* Public Accounts Committee will call Maybank's official to explain the BII's debacle. Likewise, authorities dealing with Eurocopter and the high speed broad band proposals were also to be questioned.

* Najib: Holding Augusta shares would put Proton in RM1B debts. Show us the details please!(refer here for previous coverage)