THE rising prices of steel has raised concerns about KNM Group Bhd ‘s potential earnings, in anticipation that the process equipment manufacturer’s margins may be eroded if it fails to lock in the price of the material it buys from steel millers.
In a research note, Aseambankers Research said steel millers might be reluctant to lock in forward sales of their products in the future to ride on the surging prices for the material. Due to KNM’s scale of operations, which requires substantial amount of steel, it currently secures its steel supply directly from regional steel millers at a pre-agreed price.
“Nevertheless, we think the unique relationship (between KNM and steel millers) may be short-lived, as millers may soon be reluctant to lock in forward sales in light of soaring steel prices.
As such, KNM’s margins may see some weakness in the coming quarters,” said Aseambankers which kept its buy call for KNM with a target price of RM6.50.
Meanwhile, AmResearch Sdn Bhd said that KNM’s earnings in the first quarter ended March 2008 (1QFY08) came in within the research firm’s estimates, accounting for 13% of its financial year 2008 (FY08) forecast. AmResearch expects KNM’s second half earnings to account for 70% of full-year earnings.
This is due to contributions from its three foreign subsidiaries — Borsig, Ellimetal, and HZM Companies. KNM’s earnings growth will also be underpinned by 10 additional fabrication facilities this year.
These include KNM’s two new plants in Canada and Saudi Arabia, Ellimetal’s two facilities in Belgium, HZM’s two entities in Brazil, and Borsig’s four plants in Germany.
“As utilisation rates for all its plants are close to optimum, KNM will give preference to high-value and high-margin projects ahead.
“This will lift KNM’s average selling price per tonne of process equipment going forward,” said AmResearch, which reiterated its buy call on KNM with a target price of RM8.20.
AmResearch’s 18 times price-to-earnings ratio (PER) valuation for KNM is higher than the 12 times average derived from locally listed peers. But the research firm said KNM’s higher valuation is justified due to, among others, its above average return on equity, and operating margins, besides its strong earnings visibility.
Aseambankers, meanwhile, said it did not expect KNM shares to outperform as the stock had already recovered by 42% from its recent low.
KNM saw its net profit jumped 41.3% to RM54.13 million in the first quarter ended March 2008, from RM38.32 million a year earlier, helped by a larger production capacity, and more jobs in hand. Revenue rose 26.3% to RM331.22 million from RM262.22 million.
“The board is confident that the group’s results for FY08 will exceed the financial performance of the group for FY07,” KNM said in its quarterly filings to Bursa Malaysia.
In February this year, KNM, which counts oil and gas firms, and miners as clients, had proposed to raise up to RM2.2 billion from a rights and bond issue to grow organically and acquire rivals. Subsequent to the rights issue, it also announced a two-for-one bonus issue. These exercises would expand its share capital base and lower its gearing level.
The Edge Daily 30 May 2008
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