To proposed a renounceable rights issue of up to 430.5m shares on the basis of 1 right share s for every 5 existing shares together with up to 215m free warrants on 1 free warrant for every 2 rights subscribed. The right issue price shall be fixed at a later date. The proposals are expected to be completed by 1Q15.
The free warrants come with 5 years ex piry and exercise price should be higher than RM1.00, minimise any potential dilution in near term. Expected to raise minimum of RM232m, of which RM1 16m will be used to repay bank borrowing while the remaining for working capital for RAPID and new projects.
Assuming i) right price at RM0.72; ii) fund raising of RM232m; iii) bank repayment of RM116m ; and iv) interest cost saving of RM9.3m based on weighted average interest rate of 7.96% per annum for the group, basic dilution is about 11% and will reduced our TP from RM1.35 to RM1.20. However, we believe the remaining fund used for RAPID and new projects might mitigate the dilution. To note, our current earnings forec asts have not included UK Peterborough project. Gross gearing will further reduced from 0.41 to 0.32x.
We are positive but not surprise about this exercise as it strengthens the balance sheet in order to finance potential more contract wins from RAPID and well prepare for Peterborough project. To note, the proposed right will be fully underwritten by its major shareholders and investment banks.
KNM’s share price has corrected 20% in Oct alone mainly due to concern on oil price plunged and global market correction. At current share price of RM0.745, KNM is only trading at 8.8x FY15 P/E des pite strong earnings growth prospect (CAGR of 55% from FY14-FY16). In our opinion, without any chang e on the fundamentals, we believe the sell down is overdone and this provides bargain hunting opportunity for investors. Its owner Ir Lee Swee Eng also shows his confident on the company by progressively increased its share stake in open market with price ranging from RM0.69 - RM0.815.
Despite dry newflows for upstream sector in next few months, we expect more EPCC contracts from RAPID. We understand KNM has been actively negotiating for few subcontractor jobs from the refinery packages and bidding EPCC contract for tank farms and other associated facilities. We expect continue contract newsflow for KNM until 1Q15.
i) Announcement of more RAPID contract win(s );
ii) Financial closing of EnergyPark Peterborough;
iii) Strong quarterly earnings due to lower finance cost .
We maintained our BUY call with unchanged target price of RM1.35 based on 16x FY15 P/E. Our TP have not factored in value from EnergyPark Peterborough yet.
Despite weakness in oil price, we advise investors to stay invested and subscribe to the rights . KNM is one of the alpha stocks that will benefit from the mega RAPID project for the next few years with commencement of UK Peterborough project to provide long term recurring income.
Source: Hong Leong Investment Bank Research - 20 Oct 2014
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kamal89
Time to buy ?
2014-10-21 06:20