Selling KNM For Now

As the market heads toward the end of February 2009, I would advise to be very cautious on trading KNM. I have put the stock in my recommended portfolio. I have defended the stock. However, I am getting a bit concerned on a few niggling issues which may present itself in the upcoming results announcement. May be wise to avoid holding the stock till tings are cleared up, or maybe management may want to answer the issues I have in detail in order to assuage fears. This is not your grandfather's company, its a listed entity and shareholders and investors all have the same right to information. The most recent quarter's results was announced on 26 November 2008. Technically speaking the upcoming release of results will be between 24-26 February 2009. There is no need to be arrogant, it pays to be open and transparent unless you have things to hide.

The Issues:

a) KNM Group Berhad (“KNM” or “Company”) - Proposed issuance of up to United States of America Dollar (“USD”) 350 million (or its Euro Dollar or Ringgit Malaysia (“RM”) equivalent) bonds, exchangeable into new KNM shares (“Exchangeable Bonds”) (“Proposed Exchangeable Bonds Issue”)We refer to our announcement dated 2 June 2008 where it was announced that the Securities Commission (“SC”) had vide its letter dated 30 May 2008 approved the Proposed Exchangeable Bonds Issue by KNM Capital Sdn Bhd (“KNM Cap”), a wholly-owned subsidiary of KNM.On behalf of the Board of Directors of KNM, Aseambankers Malaysia Berhad (“Aseambankers”) is pleased to announce that the SC had vide its letter dated 1 December 2008, approved an extension of time of twelve (12) months until 29 November 2009 for the implementation of the Proposed Exchangeable Bonds Issue by KNM Cap. This announcement is dated 3 December 2008.

This postponement of fund raising, is it for further M&A or a projected capital requirement, or the need to refinance existing facilities? Need clarification. Will KNM have problems raising funds? Does the extension indicate something?

b) The goodwill attached to the Borsig's acquisition, which I have highlighted before, is RM1.6bn, or 88% of shareholders' funds. I would like to see how much does Borsig brings to the bottom line. If its not as profitable as first thought, KNM may have to write down a substantial amount of goodwill which will bring the stock much lower. If there is a significant write off in goodwill, it will affect its credit rating and make fund raising a lot more difficult. Borsig's profits for FY07 was RM172m. Assuming that industry slowdown has affected it somewhat, as long at the profit for FY08 does not fall below RM140m, KNM is still on track and the goodwill issue will be averted. Borsig supposedly still has an order book of RM1.3bn for FY09 and its annual expenditure is estimated at RM92m - just don't give us any nasty surprises.

c) Being in oil & gas, the company will see some cancellation of orders, or maybe non-payment or delayed payment issues. I would want to wait and see what is revealed and said during the upcoming release before going long on KNM again.

d) On more research, I found that the company is not "open and welcoming" enough to foreign research houses. Its only local and Singapore broking research which carry the research. Only Nomura sticks out like a sore thumb. On speaking with some of the analysts, the main issue has been the company's lack of cooperation and appreciation of the need for deeper information. That is surprising considering that foreign shareholders hold a substantial amount of shares in KNM, at times in the 20%-30% range. When you are "not so willing" to be open, you may be perceived as having something to hide. As they say, the silence is deafening. In fact, this issue would trigger a big red alert to me.

e) My change of heart came from the above issues plus the one big thing, I just can't seem to get a hold on the management's DNA. Crooks or misunderstood managers?


p/s photos: Meisa Kuroki