Friday, January 02, 2009
What's Shaking KNM
What could KNM be doing to defraud investors? Fraudulent contracts, artificial jobs, not being paid, raising up debtors as revenue, cancellation of work orders, margin calls on controlling shareholder if any, impairment in the goodwill of Borsig, etc...
KNM has been sold down owing to it being a oil infrastructure play. The stock will see great volatility as the controlling shareholder holds less than 25%, next being EPF with 7.7% on nearly 4bn shares. When a controlling shareholder holds less than 25%, one tends to be suspicious.
However if you look at KNM's business model, it is one built on acquisition and managing growth by integration. Purchases are often funded by issuance of new shares thus the huge free float. Safe to say that when markets tumble, the minority but substantive shareholders (of previously merged smaller companies) will tend to throw their shares. Its part and parcel of investing in KNM.
Fund managers love it and hate it, love it because its business model is scalable, hate it because its a thematic stock. Love it because it has very good free float, hate it because it has very good free float. When oil prices are high, its an excellent proxy, same on the way down.
A fraudulent company can be easily found out in international markets, its only when its a closed door thing like Madoff or the Enron case where only a few people move figures around that can lure many unsuspecting people. When you are international markets, you have to deal with fellow peers and it becomes hard to hide company's strategies and dealings. If you check with its global peers such as FMC Technologies and Cameron International, their stock price movements mirrors that of KNM. The way KNM executes its strategy, via acquisitions, makes it even more cumbersome to do fraudulent things because there's always the "fair valuation exercise", "due diligence exercise", a seperate life before the acquisition, blah blah... you cannot really expect to overpay and do hanky panky without analysts whacking you.
The abortion of the purchase of Ellimetal NV for 20m euros shows good sense in recognising bad timing and recognising when the industry has turned. KNM has instead agreed to market Ellimetal's technology and products to KNM's Southeast Asian client base.
KNM's other aggressive planned expansion into mining for oil sands in Canada has been rightly halted. The tar sands is only profitable is price of oil is more than $85. Even if price of oil improves, a lot more strategic thinking and financial planning needs to be done before venturing into that sub sector.
Some concerns focused on the free cash flow and the enormous goodwill. One should look closely at their business model, which is acquisition by minimal cash but a lot of shares issuance, that in itself brings about a certain accounting character to lumpy items. When you do shares issuance acquisition, you want a profitable company with quality, predictable earnings - as the latter will be able to work down on the goodwiil or premium you are paying or else the share issuance program will work negatively thus destroying company value very quickly. In that sense one should appreciate KNM's strategy to buy very secure companies with secure earnings, but they also come with a price, which is usually a lot higher than book NTA, or else why would they sell to you. Its a corporate finance game which KNM plays relatively well. Their swift decisions to abort the oil tar sands and Ellimetal projects tells me that they know the game well, stop doing the acquisition tango when the trend is gone.
Sigh, KNM should hire me to do their corporate PR and institutional strategy relations... but it won't be cheap... and yes, I will take KNM share options ...lol.
Outstanding order in the books stands at RM4.3bn which is still 180% of revenue of the previous financial year. Assuming orders are zero for the next 6 months (while in actuality they are in bidding for over RM22bn of projects), and even if 20% of existing orders get cancelled, KNM is not going down the drain. That's because it has a very manageable net gearing of less than 20%.
The big danger I see is Borsig's RM1.6bn goodwill. KNM will have to ensure that Borsig is continually profitable in order to be able amortise that down over a certain period properly. If Borsig suddenly turns unprofitable, then yes, KNM is in the hell hole as that amounts to 90% of KNM's shareholder funds being wiped out instantly.
Part of KNM's rapid selldown a few months back was due to the forced selling of over 70m shares of Lee Swee Eng (the controlling shareholder) owing to the collapsed in share price and margin calls, and a subsequent selldown by Fidelity. The forced sale basically took out just 2% from Lee's stake, so its not catastrophic.
Its forward PE is at a ridiuclous 3x, even Ramunia has a higher PER. I like KNM because its a volatile stock with very good free float and will be a strong proxy on a recovery in oil prices. There are just less buyers on anything to do with oil stuff now, and KNM still has a relatively high level of foreign shareholders, nearly 30% which will dominate the price trends. I think a subtle recovery in oil will push KNM through this difficult period.
p/s photo: 2r