Apr 8, 2010

KNM GROUP : HOLD

KNM Group (RM0.78; Hold; Price Target: RM0.90; KNMG MK)

RM1.4b tax incentive granted for Borsig acquisition


KNM announced today that the Ministry of Finance has approved a total tax incentive of RM1.4b in respect of the Borsig’s acquisition cost and other approved costs related to the said acquisition. The tax incentive will apply for a period of 4 years, running in effect from the Assessment Year of 2009 onwards.

KNM has been actively lobbying for the tax incentive when the company acquired Borsig in 2008. We understand that the incentive is only applicable to KNM’s local operation which currently accounts for c.30-35% of earnings. At the present level, this would nudge our earnings forecast up by c.9.9% for FY10-11F, from our conservative assumptions of 25% local corporate tax level and 30% contribution from local operations. In addition, we understand that the excess tax incentive unutilised in the four year period could be carried forward for an indefinite period of time. In our view, this would translate into c.RM350m of tax savings over a probable period of 7 years.

We are mildly positive on the news as this would help to a certain extent mitigate the poor 4Q09 result and negative investor’s sentiment on the company. Our Hold call remains unchanged at this juncture. Nevertheless, we estimated that KNM’s FY10-11F PE would reduce to 13.1x and 9.8x, respectively, with the tax incentives.

source: HWDBS Vickers