KNM Group (RM0.77; Hold; Price Target: RM0.90; KNMG MK)
Due diligence process drags on
To the disappointment of many investors, KNM Group announced to the exchange at market close today that BlueFire Capital Group (Bidco) has yet to conclude its discussion with the company. This is regarding Bidco's, an entity controlled by founder Mr Lee Swee Eng, and two foreign funds offer to acquire the entire business and undertakings of KNM.
The board of directors of KNM has not extended the exclusivity period granted to Bidco to undertake due diligence and satisfy the other conditions of the proposal, but both parties have agreed “to endeavor” to conclude discussions by 16 April 2010.
We view this news negatively and think this could be a sentiment dampener on the already weak share price. The announcement may raise concerns of whether the proposal will materialize. In addition, there is also the possibility of a lower revised offer price from Bidco, considering the provision for foreseeable losses and asset write-downs undertaken by the company in its recent 4Q09 results announcement.
Although current share price offers a potential c.17% upside to the proposed offer price of RM0.90/share, we are maintaining our Hold call at this juncture, having taken into consideration several risk factors such as: (i) potential lower offer price; (ii) heightened earnings risk; and (iii) negative investor’s sentiment. source: HwangDBS Research