AmResearch cautious on KNM's big Chad contract

 

AmResearch sees high risks involved in the Sedigi project, such as the stability of the government, supply of crude oil and gas, financing sources and execution risks.

AMRESEARCH Sdn Bhd is maintaining its "hold" call on KNM Group Bhd despite its having clinched a US$220 million (RM774 million) contract to develop, operate and maintain the Sedigi oilfield facilities in Chad.

"Given the losses experienced by other Malaysian contractors in less risky countries such as India and the Middle East, we are cautious on this project and have not revised our forecast at this juncture.

"Furthermore, this will be the first time that KNM assumes the role of project manager," AmResearch said in its research note.

On Thursday, KNM announced that its wholly-owned unit, KNM Process Systems Sdn Bhd, had entered into a memorandum of agreement (MOA) with Societe Des Hydrocarbures Du Tchad SA (the national oil corporation of Chad).

The MOA, among other things, will see KNM Process undertake a 24-month engineering, procurement, construction and commissioning contract worth about US$220 million.

KNM said the MOA involved the setting up of a 60:40 joint-venture operating company, which will be granted a five-year concession to develop, operate and maintain the Sedigi facilities.

AmResearch noted that although KNM will own 60 per cent of the prospective concession, the group is hoping to recognise upfront construction earnings from the project via special purpose vehicles, which could classify the facilities as off balance sheet assets.

However, it said that there were high risks involved in the project, such as stability of government, supply of crude oil and gas, financing sources and execution risks.

HwangDBS, however, is maintaining a "buy" call on KNM with a target price of RM1.10 based on 10 times its financial year 2010 forecast price-earnings ratio, which is its mid-cycle valuation.

HwangDBS considers the project as the best proxy for Malaysian oil and gas play and expects more ventures to flow through for KNM given the higher crude oil price.

"We expect more projects to flow through for KNM. EBIT (earnings before interest and tax) margin for the EPCC (engineering, procurement, construction and commissioning) work for this project is estimated at 15 per cent, with EBIT contribution at RM116 million," Hwang DBS said in its report.