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W3Schools

Friday, April 9, 2010

KNM Group Target Price RM0.90

• RM1.42bn tax incentive
KNMG yesterday announced that they had received from the Ministry of Finance a total tax incentive of RM1.423bn to be granted and applied over four (4) years (with effect from the Year of Assessment 2009 onwards) in respect of the acquisition cost and other approved incidental costs which has been incurred by KNMPS (KNM Process Systems) for the BORSIG Acquisition. To recap, KNM had applied for this tax incentive back when the acquisition was being made but it has only just been approved. It involved a due diligence carried out by the Ministry to assess the business and the sum and term was also determined by the Ministry.

• Applies to only tax paid for Malaysia
The tax incentive applies to tax paid in Malaysia. Hence, in order to maximise the incentive, KNM ideally has to bring in more business to Malaysia/ domesticate their manufacturing operations. To note, currently some 60% of the tax typically paid is for foreign operations. • Effective tax rate to progressively decline

The impact of the RM1.42bn will not be felt immediately as the group will be in process of moving more operations into Malaysia. As such, effective tax rate will progressively decline to about 20% (from statutory rate level) to 5% achieved in 2012. We are adjusting down our numbers to reflect a 20% rate in 2010, 10% in FY11 and 5% in FY12.

• And of other things…
The reaction to this news will most certainly be positive for the stock and could possibly see KNM trading towards the 90 sen management buyout price. Having reported the loss last quarter, natural wariness causes us to have estimates for FY10 and FY11 below that of consensus and we also expect that upcoming 1QFY10 numbers will likely be poor. To note, current orderbook hovers around the RM2bn mark. April 16th will now be the next date to look to for the Group on whether this exercise is going to proceed. We have inkling that the authorities may want some involvement in this given the current move to change regulations to prevent such exercises.

• Maintain HOLD with 90 sen target


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