Apr 15, 2010

KNM - What Now?

Deal’s off! What now?
•  News
KNM Group yesterday announced that after due deliberation, the company and BlueFire Capital Group Ltd, including its partners GS Capital Partners VI Fund L.P and Mettiz Capital Limited, were unable to reach an agreement on the pricing of the proposed acquisition of KNM’s assets and liabilities. Hence, the parties have mutually agreed that the proposal made by BlueFire on 4 February 2010 has lapsed. (BT)

•  Comments
We were rooting for the buyout to go through but perhaps had doubts on whether the 90 sen price was going to hold. But it appears that the entire deal is now off, and likely not to emerge in a similar form again. Speculation will be rife on why the deal didn’t go through. We believe some confidence in the stock could be lost, as the  90 sen price was second guessed. Should things be seen from this perspective, then it is likely that KNM’s share price will experience a sell down upon the market opening today. 

On the other hand, with the share price never reaching the 90 sen target, it could be viewed that it was priced in that the management buyout was never destined to take place. Hence, share price should not see much downside from here or even a knee jerk reaction. As it is, we are going to revert to our previous valuation methodology which is a 12x PE (historical
average) pegging FY11f EPS of 6.1sen. This would be citing the stock as fully valued at these levels as it derives a target price of 73sen. 

Just to note, KNM continues to have an orderbook of about RM2.2bn and is expecting more replenishments to come through this year as compared to last. Indeed the case should be so given the O&G  industry being on better footing this year than last. Sure, the natural gas market continues to lag behind but the maintenance of an orderbook above RM2.0bn shows some stabilising in job flows. Last quarter’s loss of RM31m was attributed to poor economic conditions and the lull in orderbook replenishment. We are hence not expecting a major recovery into 1Q10, therefore recommend being somewhat cautious on KNM for now and watch for a potential knee jerk reaction to the failed buyout news (or lack there of). 2H expectations however are better barring all unforeseen circumstances. 

source: ECMLibra