The company, which has fallen off the radar of most investment houses after a wrongly timed expansion at the height of the financial crisis in 2008, said Exim Bank is the lead arranger for a syndicated loan for the project.
The project, which will generate electricity from a biomass and waste-recycling facility within the Peterborough enclave in the UK, makes up some 43% of KNM’s RM5.1 billion order book.
If successfully implemented, it will provide KNM with recurring cash flow, giving some comfort for the company whose earnings are driven by contracts.
“Exim Bank, being the lead arranger [for a syndicated loan], is expected to complete the syndication soon. In addition, we expect a decent IRR [internal rate of return] from this project with the potential of providing long-term recurring income for the group,” KNM replied to questions from The Edge Financial Daily last week.
However, reports from analysts after a briefing by the company last week indicated that the financing facility involves a loan amounting to £187 million (RM921 million) that is expected to be finalised by October.
“Borsig has the expertise in this EPCC [engineering, procurement, CONSTRUCTION and commissioning] project with a relatively high margin and we are expecting a steady recurring income thereafter,” said KNM, which acquired Borsig for €350 million (RM1.7 billion then) cash in 2008.
But the fund-raising exercise in the midst of the liquidity crisis in 2008 was difficult because oil prices had skidded to about US$40 (RM125.20) a barrel.
The stock fell to as low as 32 sen in March 2009, a far cry from its heyday where it was able to undertake a placement at RM6 in 2006 and a rights issue at RM4 in June 2008.
After some four years, only last week were there some positive developments with KNM in relation to its acquisition of Borsiq.
KNM has 80% in the project to develop an 80MW renewable energy plant while the remaining 20% is held by Peterborough Renewable Energy Ltd (PREL). However, analysts remain cautious on the implementation of the project until further clarity and financial closure.
“Despite these developments, we remain cautious on the Peterborough project given the current weak economic conditions in Europe. We had already removed the Peterborough contract from our 2012 earnings estimates in November 2011.
“Nonetheless, further developments that imply the project would take off would prompt us to revisit our earnings forecast. We note that a key re-rating catalyst would be the confirmed take-off of its Peterborough project,” RHB Research Institute Sdn Bhd wrote in a note last week.
RHB said while it is still cautious on KNM’s UK project, the research firm is more optimistic on the company’s prospects due to its better first-half financials, resulting in it tagging a fair value of 74 sen for the stock.
It is worth noting that KNM’s latest updates on its project in the UK come at a time when the company announced that one of its potential multi-billion ringgit deals in Malaysia is not materialising.
Last week, KNM said the heads of agreements for its proposed downstream oil and gas (O&G) project in Teluk Ramunia, Johor, had lapsed without any financial closure.
KNM had announced in July 2011 that the company together with ZECON BHD [] had signed the heads of agreements with Gulf Asian Petroleum Sdn Bhd to undertake downstream O&G projects with a collective value of RM17 billion.
But KNM contends that its prospects are expected to improve despite the setback. According to the company, it has submitted tenders for RM16 billion worth of projects, a move which is expected to improve the company’s earnings visibility.
The firm said the primary driver of growth will still come from its core process equipment manufacturing operations.
“We are confident we will continue to win contracts with high margins. In fact, we are currently bidding for contracts with high margin and our tender book stands strongly at RM16 billion.
“Going forward, you can expect to see our gross profit margin improve as we shall be clearing all the low margin contracts by 4Q this year,” KNM said.
The company, however, declined to elaborate on its oil sands project in Canada, only indicating that the project is contributing positively to the company’s revenue stream.
KNM announced last week that its net profit more than tripled to RM33.84 million in the second quarter ended June 30 from RM10.86 million a year earlier, helped by a stronger order book and higher-margin projects. Revenue rose 8% to RM586.7 million from RM544.3 million previously.
This article is appeared in The Edge Financial Daily on 22 August, 2012.