KNM: Borsig acquisition completed

KNM GROUP BHD
Price: RM6.40
Fair Value: RM7.26


• Acquisition of Borsig of Germany for RM1.7bn completed. The completion is slightly ahead schedule.
KNM would now concentrate on intergrating the new acquisitions into the group.
• Upgraded PAT guidance for FY09 from RM700m to RM750m arising from higher average selling prices
(ASP) as the company moves up the technological curve. ASP to improve from RM18,000 per mt in
FY08 to RM22,000 per mt in FY09.
• Profit guidance is based on current orders in hand and respective subsidiary company’s order flow.
Synergistic benefits arising from cross utulisation of resources (like central purchasing, treasury, central
engineering and costing, etc) are not taken into account.
• Capacity for FY08 is 160,000mt p.a. while in FY09 it will be 185,300mt p.a. Capacity utilisation would be
90% in FY09 as Borsig’s low- to medium-end fabrication work would be outsourced to Malaysia as part
of the capacity rationalization to produce synergistic benefits and technology transfer.
• Order book stands at RM4.2bn. Tender book at RM20bn with estimated order win at RM4bn.
• Possible upgrade to earnings as KNM rationalizes the orders throughout the group. Would also be
opening a new area of growth via the provision of maintenance services of especially of Borsig’s highend
process equipment. KNM would be applying for a tax waiver for its Borsig acquisition. Based on the
acquisition price of RM1.7bn, it is likely that the tax credit would stretch over 5 years of more.
• Borsig provides a new market to KNM i.e. Europe. Moreover, with a more complete product range from
low to high-end the expanded KNM group can now bid for high margin big orders.
• Orders flow visibility is high over the next few years as companies scramble to take advantage of the
high oil price.
• Upgraded our fair value to RM7.26 on account of improved PAT in FY09 and removal of 10% risk
discount from our PER target of 15x. The discount was incorporated due to the yet to be completion of
the Borsig acquisition. Upside potential is 13.4%.
• It is possible that KNM be rerated to a higher PER of 18x on an improving equity market and the return
of risk adverse investors. We also note that Asia Pacific Re Fidelity JP Morgan, Bournemouth holds
115.3m or 10.9% of KNM for its various funds. Based on a PER of 18x, fair value is RM8.70 (x-all -
RM2.90) giving a potential upside of 36%. BUY maintained.
Worth noting, what we said previously about KNM, which we recap below.
• Has ability to source out and acquire poorly performing companies and turn them around
• The acquired companies come with higher technology and new customers, hence expanding its product
offering and customers base and markets.
• Besides manufacturing capability, the M&A also adds to manufacturing capacity
• Current acquisitions are successful companies with even higher technology (hence, higher margins) and
entry into new segment of the oil and gas sector
• Has a good risk management system in the face volatile raw material prices and currency. KNM adopts
a policy of hedging its exposure in currency and raw materials via forward contracts for currency and
back-to-back arrangement with its suppliers for raw materials.
• Adopts central monitoring of vital business functions i.e. contracts tendering, treasury, finance and
procurement help keep cost in check and risk acceptable.


From Jupiter Securities