Thursday 28 Mar 2024
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KUALA LUMPUR: OSK Research is maintaining its Neutral stance on KNM Group Bhd and technically, its fair value for the share is 59 sen based on its existing PER of 12 times FY10 EPS.

It said on Thursday, April 8 that since BlueFire Capital Group Ltd (Bidco), an entity controlled by Lee Swee Eng, the Group MD, offered to acquire the company’s entire business and undertakings at 90, it used this as its target price, unless Bidco decides to pull out of the acquisition.

On Wednesday, KNM announced that it has received a total tax incentive of RM1.4 billion from the Ministry of Finance in respect of acquisition cost and other approved incidental costs incurred by KNM Process Systems SB (KNMPS) in relation to Borsig’s acquisition. This incentive will be applied over four years, with effect from the year of assessment 2009.

KNMPS is a 100% subsidiary of KNM Group and also owns 100% of Borsig. The research house said the tax payable on income generated by KNMPS for work done in Malaysia, which includes Borsig’s process equipment manufactured here, can be offset against this RM1.4 billion tax incentive from MoF.

“However, we also understand that the proportion of Borsig’s process equipment being manufactured in Malaysia to date is still minimal at probably less than 10% of that being manufactured in Germany.

“Hence, we do not expect this incentive to have material impact on KNM’s profit and loss account in the near term (probably about 5%-10% only) until we see more of Borsig’s products being fabricated in Malaysia,” it said.

OSK Research believed both KNM and its customers will need time to adapt to and accept Borsig’s process equipment fabricated in Malaysia.

“Although it seems more commercially viable to carry out fabrication works here as it would be a win-win for both parties whereby KNM will benefit from the tax incentive and technology transfer while its customers benefit from cheaper process equipment as a result of cheaper labour in Malaysia, we think there is still an acceptance gap in terms of where the end product is from.

“This is because Borsig manufactures mostly the higher end process equipment and we believe that its customers would rather pay more for a product made in Germany than in Malaysia since the technology and manpower skills originate from Germany,” it said.

OSK Research said  KNM’s Malaysian workforce may also need time to go through the learning curve. In conclusion, it viewed this incentive as being of longer term benefit to KNM and maintained its FY10-11 earnings forecasts for now.

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