KUCHING: KNM Group Bhd’s (KNM) orderbook of above RM4 billion should be able to keep the company busy for the next two years. The company’s current tenderbook stands at more than RM16 billion.
BIOMASS ENERGY GENERATION PLANT: KNM recently announced that its 100 per cent subsidiary KPS, has entered into an EPC contract to generate energy from biomass and a waste recycling centre known as ‘EnergyPark Peterborough’ in Peterborough, the UK. — Photo by Agragas, Inc
KNM recently announced that its 100 per cent subsidiary KNM Process Systems Sdn Bhd (KPS), had entered into an engineering, procurement and construction (EPC) contract towards the development of a plant with gross capacity of approximately 80 megawatts (MW) to generate energy from biomass and a waste recycling centre known as ‘EnergyPark Peterborough’ in Peterborough, the UK.
The contract from Peterborough Renewable Energy Ltd (PREL), valued at £450 million (RM2.2 billion) would cover the duration of about four years starting from the commencement date which was yet to be determined.
“We gather that the amount would likely be equally spread over the four-year period, which would amount to about RM500 million a year.
“We also understand that this EPC project includes the structural construction, which would likely be carried out by a third party, the gross margin expected to be more than 20 per cent and although the commencement date is yet to be determined, there is no risk to KNM as we understand that the deposit received by the company is enough to cover the cost of initial material to be purchased,” said OSK Research Sdn Bhd’s (OSK Research) analyst, Jason Yap.
Yap noted that there was no change to KNM’s financial year 2010 (FY10) to financial year 2011 (FY11) earnings.
“This is because we had earlier assumed some orderbook replenishment for the company based on the success rate guidance from its management,” he added.
Given the positive investor sentiment on the stock, he believed there would be more upside to its share price since this stock was traditionally driven by positive news flow such as contract announcements.
Hence, OSK Research was upgrading its target price for the company to RM3.45 per share, which was based on a higher price earnings ratio (PER) of 14 times FY11 earnings per share (EPS).
“Our valuation is slightly higher than the current industry average of 13 times because we believe that at the rate the share prices of most oil and gas (O&G) companies are performing, we think that the industry average would soon catch up to 14 times.
“As for KNM, we believe its share price would react positively to this big one-off contract in the short term,” Yap said.
However, as for the longer term sustainability of its share price, he believed that investors would need more assurance in the form of continuous contracts flow, on which he was still not entirely certain since the global O&G industry had not fully recovered in the past 12 months although crude oil prices had stabilised at about US$80 per barrel.
Yap noted that KNM was a global O&G process equipment company, which made its business dependent on the health of the global economy and not Malaysia alone.