Saturday, January 12, 2008

KNM On Speed

Readers will be aware that this is the first time I'm blogging about this wonder stock. In actual fact I wanted to do it twice, but each time before posting, the stock would have another big run up. Don't really want to jump in the party with nice comments after the stock has jumped.

Now it has reached a level which is interesting. The stock has gone up by nearly 30% since end November. Among the catalysts were: MSCI inclusion, and brilliant Brazilian acquisition that will boost EPS growth.
Orderbook has grew significantlt from RM2.1bn in September to RM2.5bn. Plus the company is still tendering for another RM11bn work worth jobs. A recent roadshow in London and HK added new buyers to the list.

Besides the impressive ROA (>15% for next 3 years) and ROE (> 40% for next 3 years), what I see as real positives are:

a) Solid business model

b) Top rate expansion and execution team

c) Global outlook

KNM has 1.046bn shares and a market cap of more than RM8bn. However, the controlling shareholders: Inter Merger 25%, HSBC Nominees (Foreign) 12% and Cartaben Nominees (Foreign) 6.7% hold less than 45% of the company. However, to me that IS the defining cornerstone for the company. You don't have to own 50% or more of your company all the time. The bulk of Asian companies are entrepreneur driven and tend to hold onto control at the expense of expansion. The way the company is going, it looks like the controlling shareholders would not mind diluting their stake further for a bigger company.
That is the one major lesson that all small Asian companies should learn. Learn to let go. Look at the majority of biggest 100 companies in the world, no one really is controlling the company, all substantial shareholders are holding 10% or less. Thats because owning 10% of a RM20bn company is a lot better than owning 50% of a RM1bn company. If you run a company well, no one will want to boot you out. Even if the company gets bought out, it will be at a significant premium. Never treat a company like a lover, you will only get restricted and disappointed. A check of the Board members shows the thinking behind the company - integrity and top notch management. KNM is heading the right way.

Following its share price nearing RM8.50, I now see some houses starting to call for a Neutral rating or even a Take Profit rating. Nothing much has changed, the strategies are in place, and from past record, their execution plans have been excellent.
KNM's acquisition of HZM of Brazil is a very significant deal which will allow for access to Latin America's booming oil & gas and minerals industries. The deal looks cheap, maybe there are some loopholes we are not aware of, but buying at 0.9x enterprise value smacks of a bargain. As long as the deal gets done properly with no delay, its a huge boost for KNM. To call for a Take Profit stance would be way too early.

If you were to examine KNM's business model, they still have expansion plans into high end process equipment and newer technologies involving CO2 removal, sulphur extraction and desalination operations. All with strong upcycle in their industry outlook.
For 2008, I think KNM may trade within RM7.50-RM10.50 and may test RM13.00 next year. One should trade out at the higher end of the range and buyback at the lower end. Cannot put an outright sell on the counter. Not for one that is doing so many things right. The Petronas training has yielded results: they won't be content with a RM8bn company. It can easily be a RM20bn company 3-4 years down the road: that's the road all forward looking companies should take. The world is your oyster, don't be happy with just ikan kurau.


KNM is a home grown Malaysian company with a global brand. It is renowned as Malaysia’s leading, world class process equipment manufacturer of the oil, gas, petrochemicals and minerals processing industries with an established and extensive track record of over 100 reputable customers worldwide.

The Group’s current principal market covers North America, South America, Europe, Africa, West Asia, East Asia, Australia and Oceania. As at December 31, 2005, export market contributes to approximately 96% of its sales revenue.

The company’s scope of activities include designing, manufacturing, fabricating, assembling, commissioning and maintenance of process equipment, mounded bullets, pressure vessels, heat exchangers, skid mounted assemblies, process piping systems, storage tanks, specialized structural assemblies and module assemblies for the oil, gas, petrochemicals and minerals processing industries.

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