Another hindsight 'prognosticator. They are really in the pay of the share and blue whale. The silver lining I first wrote on this forum may indeed brighten up and the cloud is shrinking. The stress test result is not out yet.
HwangDBS Vickers Research believes that the worst of the demand destruction for KNM Group Bhd is over, given the sustainable crude oil price at about US$50 (RM180) per barrel on the back of production cuts by the Organisation of the Petroleum Exporting Countries (Opec), as well as an expected stronger economy in the second half (2H) of the year.

The oil and gas equipment manufacturer secured only RM300 million new orders since December last year and recent orders were mainly from upstream projects in the Middle East (50%) and North America (50%), the research house said in a report yesterday.

Nevertheless, there had not been project cancellations since the RM85 million worth of projects in February, comprising mainly the RM77 million Canadian oil sand project, it added.

“We expect minimal project cancellation for KNM’s RM3.9 billion order book and new contracts from its RM18 billion tender book to flow through from 3Q09 onwards as we understand that oil majors have started to call for tenders of projects under 2009 capex,” it said.

“We assume RM1 billion and RM2.5 billion new contract wins for FY09 to FY10; and new wins account for 28% and 68% of our FY09 to FY10 net profit, respectively. We believe risk of earnings downside is priced in given attractive valuation at five times FY10 price earnings (PE), against local and regional peers’ average of six times and 12 times, respectively.”

Meanwhile, as KNM has refinanced its short-term loan and reclassified the intangible assets, there is minimal risk on the Borsig acquisition, according to HwangDBS. It expected Borsig to contribute 35% of KNM’s FY09 net profit.

In view of the “attractive” risk-reward profile, the research house has upgraded KNM to a buy with a target price of 85 sen based on eight times FY10 earnings per share, in anticipation of new order flows.

“KNM should benefit from an upswing in equity markets given its high beta of 1.7 times and good liquidity. We view any share price pullbacks as good buying opportunities, given our positive view on the oil and gas sector and stronger 2H09 economic fundamentals,” it added.