Thursday, December 7

Contract award a boost for KNM


KUCHING: The award of a contract to oil and gas (O&G) player KNM Group Bhd (KNM) through its subsidiary, KNM Process Systems Sdn Bhd to develop gas condensate fields in Uzbekistan was seen as a good step forward by analysts.

TIMELY AWARD: OSK Research’s analyst believes that the contract should be able to keep the company busy for the next 12 months and replenish the group’s order book to above RM2 billion. – Photo from

“This job is much-welcomed news for KNM which has seen a major contract drought over the past 18 months,” opined ECM Libra Capital Sdn Bhd’s (ECM Libra) head analyst Bernard Ching.

This contract woul entail KNM supplying technical documentation, equipment and services to the Lukoil Uzbekistan Operating Company.

“Excluding this job, the company’s total order book is at roughly RM1.8 billion, barely enough to take them through the financial year 2011 (FY11) hence these jobs provide them a significant boost.”

He further added that the contract amounted to US$216 million (about RM680 million) for a contract duration of two years. The contract will start contributing in FY11.

OSK Research Sdn Bhd (OSK Research) O&G analyst Jason Yap believed that KNM’s lack of contract award was not a problem faced alone, adding that the slowdown in contract award was an industry-wide problem.

“Oil majors and national oil companies have been conservative in their capex (capital expenditure) spending following the slower global economy which then cause uncertainty in the future demand for O&G,” Yap said.

“This amount should be able to keep the company busy for the next 12 months and replenish the group’s order book to above RM2 billion. Also, we believe KNM’s tenderbook now is more than RM10 billion.”

Ching further added that he had yet to discover whether the contract was on a cost plus or fixed price basis.

“A cost plus job would naturally be a safer option for the group. A quick check on Uzbekistan indicates that the country is politically stable hence we view that country risk arising from geopolitical issues is limited,” he affirmed.

Yap pointed out, “We believe its share price would react positively to this big one-off contract in the short term. However, as for its share price sustainability in the longer term, we believe investors would need assurance on the continuous contract flows which we still doubt as the global O&G industry has not fully reached its recovery stage in the past 12 months.

“Furthermore, with more countries raising interest rates, this may suppress the global economic growth, which then result in lower demand for energy and this again may delay the oil majors and national oil companies from spending further capex,” he continued.

“KNM is a global O&G process equipment company and hence its business is dependent on the health of the global economy rather than Malaysia alone. Therefore, we have a Trading Buy call on the stock rather than a Buy,” he added.