KNM ... Jun10

Lee Swee Eng, managing director and acting chairman of KNM Group Bhd (KNM), said he would not rule out the possibility of a future privatisation exercise. The stumbling block was the funding issue. If the opportunity arises, it will look into it.
The oil and gas fabricator came into the spotlight in February 2010, when a trio of suitors acting in concert, offered to acquire KNM’s entire business and undertakings for 90 sen a share or an estimated RM3.5 billion. The bidding companies included a vehicle of Lee’s, BlueFire Capital Group Ltd, as well as GS Capital Partners and Mettiz Capital. Mettiz Capital is owned by Michael Tang Vee Mun, while GS Capital Partners is a unit of Goldman Sachs.

Lee is the major shareholder of KNM, holding an indirect stake of 22%.

Despite the setback, KNM was looking to replace the current low to mid-end process equipment with higher-end products and services. The products would be offered at a “significant” reduction similar to European equipment.

This move comes in line with the company’s RM1.42 billion tax incentive, which arose from the acquisition of Borsig GmbH by KNM’s wholly owned subsidiary KNM Process Systems Sdn Bhd in 2008. The tax incentive represents 83% of Borsig’s purchase price of €350 million (RM1.7 billion).

Borsig is a German company whose subsidiaries are in the development, manufacture, installation and maintenance of plant and processing equipment in the chemical, petrochemical, oil and gas, power and industrial service industries.

KNM would leverage on the technology from Borsig to move up value chain. Borsig is a German company whose subsidiaries are in the development, manufacture, installation and maintenance of plant and processing equipment in the chemical, petrochemical, oil and gas, power and industrial service industries.

KNM had on Feb 29, 2008 signed a sale and purchase agreement to acquire 100% of Borsig for cash consideration of Euros 350 million. The cash consideration was then equivalent to about RM1.669 billion based on an exchange rate of RM4.77:Euro1.00.

Low and mid-end products tend to come under pressure in a downturn such as this. KNM has tough competition from Korean and regional firms. It will duplicate the manufacturing process of the European factories in its Malaysian factories to substitute the lower product line in Asia Pacific.

KNM’s plant in Gebeng, Kuantan would manufacture Borsig process equipment and implementation would be completed by the end of 2010. The new products would be realised in 2011.

The improvement over 2009 will be reflected in 2Q of 2010 rather than 1Q2010.
KNM increased its order book to RM2.1 billion from RM1.5 billion a year ago. The order book, which consists mainly of Middle Eastern and Australian orders, is expected to last 18 months.

The commissioning date of KNM’s plant in Saudi Arabia is estimated to be a further two months later than the original target of mid-2010, as the company has yet to obtain full approvals.

For its first three months of FY2010, KNM posted a net profit of RM40.33 million on the back of RM373.30 million in revenue. Earnings per share stood at 1.02 sen. In contrast to the corresponding quarter a year ago, KNM’s net profits tumbled 59% while revenue fell almost 29%.

The fall in net profits and revenue was mostly due to the dull market and the collapse in the price of oil in 2009.

The company also repurchased 21.4 million shares during the financial year ended Dec 31, 2009. This was due to KNM’s strong cash position and its perception that the stock was undervalued at the time.

As at end-March 2010, KNM had cash and cash equivalents amounting to RM496.67 million.

It has increased its order book to RM2.1 billion as for now from RM1.5 billion a year ago. The book order was enough to last 18 months.