Introduction

In this report we tried to evaluate the financial performance as well as financial position of two companies

of KNM Group Berhad (7164) and Wah Seong Corporation Berhad (5142) which are both operate in oil

and gas industry. To reach objective of this report we undergone the process of financial statement

analysis which is consists of Accounting analysis, Financial analysis and Prospective analysis.

On fortunately we do not cover the first step even though it is very important and prerequisite to next two

steps, as accounting analysis determines the reliability of financial statements. However this task requires

access to detail information related to company’s financial and operational activities which is not

available to us.

In terms of financial analysis, the report initially presents the time series analysis for each of companies

past 5 years (2004 to 2008) and then progress into intercompany comparison of financial ratios. In both

parts the report evaluates the liquidity, capital structure and solvency, operating performance and asset

utilization ratios to assess the risk and profitability of each company.

Profitability analysis is the process of analysis of the company’s return on investment by referring to two

major sources of profitability, the margin which refers to percentage of sales not offset by cost and

turnover which also refers to asset utilization.

Risk analysis is the process of Evaluation Company’s ability to fulfill their commitments which involves

short term (liquidity analysis) and long-term (solvency) to assess the whole company risk. This is also

referred to credit analysis as well.

As the last step of financial statement analysis, this paper conducts prospective analysis of these

companies in order to determine the intrinsic (fair) value of their shares. This is done through estimation

of each company’s income statement for next 5 years (2009-20013) and discounting back the future

earnings. It is important to notice that getting the intrinsic value of these companies in order to facilitate

the decision making (buy, hold, sell) is the ultimate objective of this research.

The background and market strategy of the two companies is discussed on the first part of this report to

give the reader a better comprehension on each company.

Risk analysis profitability

Liquidity solvency Return on asset (ROA)

Current ratio Total debt to equity Return on equity (ROE)

Quick ratio Long term debt to equity Net profit margin

Collection period Time’s interest earned Asset utilization

Days to sell inventory Inventory turnover

Account receivable turnover

Strategy Analysis

KNM

KNM is a world class process equipment manufacturer and is ranked 1st in Malaysia, top 2 producer in the

world for air-fin coolers and top 3 in heat exchangers products. It has 13 plants in 8 countries and

strategically located at the oil and gas hotspot. KNM has exposure to both upstream and downstream

segments.

The company’s strategy is simple, which is to be among the top 10 players in the O&G and energy

industry. But the matter of how lies on the management of the company and their vision on making it

reality. Over the years we see that the expansion plans that the company have made the company more

efficiently competing with other players in the market. It proves that the strategy of vastly expanding the

company to gain market percentage works. The company sees that the growth of the O&G and energy

industry will increase tremendously, thus the management take steps further on expanding the company to

cater with the demand.

Wah Seong

Wah Seong is currently one of three leading oil and gas pipe coaters in the world. Its line of work

specialization consists of oil and gas pipe coating, gas compressor and manufacturing of steel pipes.

Given that the pipe coating business is in effect an oligopoly in Asia, Wah Seong stands a good chance of

securing new pipeline projects in Malaysia and Asia.

In the perspective of the growth of the Group, Wah Seong actively look for and invest in the development

and growth of its human capital as well as the strengthening of its values and performance driven culture.

Since undertaking various major acquisitions in 2005 and 2006, the Group continued to consolidate and

balance its operations, focusing on cost and efficiency improvements, and strengthening its financial

position. Wah Seong Group has been able to steadily enhance their shareholders' value mainly through

internal growth.

Over the last two years through 2008, the Group has invested significant financial resources in increasing

and developing its productive and engineering capabilities and facilities, primarily in deepwater corrosion

protection and compressors rental fleets, which are now generating income streams. Currently, the Group

is anticipating minimal capital expenditure to be incurred for the year 2009 and 2010, which will translate

into improved cash flows and further reinforcing of the Group's balance sheet in 2009 and 2010.

It is worth noted that there was a huge increase in Wah Seong’s short term debt during the year 2008.

This is due to the initial funding for the Turkmenistan Block 1 Gas Development Project.

Time Series Analysis

*please note that we used http://www.securities.com/ch.html?pc=MY as source to check our ratios.

KNM Ratio Analysis

KNM Financial Ratios

2004 2005 2006 2007 2008 Average

Liquidity

Current Ratio 3.18 1.52 1.16 1.29 1.01 1.63

Acid-Test 3.04 1.47 1.10 1.17 0.95 1.55

Collection Period 215.86141.1

0 173.64 144.34 128.06 160.60

Days to sell inventory 17.90 7.93 7.46 17.16 15.74 13.24

Capital Structure and Solvency

Total debt to equity 1.35 0.69 0.51 0.48 0.79 0.76

Long-term debt to equity 1.23 0.63 0.32 0.24 0.42 0.57

Times interest earned 8.45 10.85 15.73 22.78 7.91 13.14

Return on Investment

ROA(%) 4.47 11.41 13.05 15.05 7.56 10.31

ROE(%) 12.65 26.15 33.95 33.87 18.54 25.03

Operating Performances

Gross profit margin(%) 21.91 23.16 21.58 25.88 27.93 24.09

Operating profit margin(%) 8.51 28.50 13.20 18.29 20.23 17.75

Net profit margin(%) 8.41 11.97 14.58 15.29 13.30 12.71

Assets Utilization

Cash turnover 11.03 15.71 16.72 12.52 8.14 12.82

Account receivable turnover 1.67 2.64 3.17 2.49 2.81 2.55

Inventory turnover 20.11 45.40 48.28 20.97 22.87 31.53

Working capital turnover 10.13 4.22 14.23 10.54 29.65 13.75

PPE turnover 1.83 2.93 2.73 2.85 4.20 2.91

Total assets turnover 0.56 0.95 0.89 0.98 0.57 0.79

Growth of KNM Financial Ratios

2005 2006 2007 2008 Average

Liquidity

Current Ratio -52.26% -23.80% 11.26% -21.71% -21.63%

Acid-Test -51.65% -25.12% 6.36% -18.80% -22.30%

Collection Period -34.63% 23.06% -16.87% -11.28% -9.93%

Days to sell inventory -55.70% -5.93% 130.03% -8.28% 15.03%

Capital Structure and Solvency

Total debt to equity -48.89% -26.09% -5.88% 64.58% -4.07%

Long-term debt to equity -48.41% -49.45% -25.00% 75.00% -11.96%

Times interest earned 28.42% 44.98% 44.82% -65.28% 13.24%

Return on Investment

ROA 155.26% 14.37% 15.33% -49.77% 33.80%

ROE 106.72% 29.83% -0.24% -45.26% 22.76%

Operating Performances

Gross profit margin 5.71% -6.82% 19.93% 7.92% 6.68%

Operating profit margin 234.90% -53.68% 38.56% 10.61% 57.60%

Net profit margin 42.33% 21.80% 4.87% -13.02% 14.00%

Assets Utilization

Cash turnover 42.48% 6.43% -25.12% -34.98% -2.80%

Account receivable turnover 58.00% 20.30% -21.45% 12.85% 17.43%

Inventory turnover 125.72% 6.34% -56.57% 9.06% 21.14%

Working capital turnover -58.36% 237.20% -25.93% 181.31% 83.56%

PPE turnover 60.22% -6.83% 4.40% 47.37% 26.29%

Total assets turnover 69.64% -6.32% 10.11% -41.84% 7.90%

Liquidity Analysis

2004 2005 2006 2007 20080.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Current Ratio

2005 2006 2007 2008

-60.00%

-50.00%

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

Current Ratio Growth

Based on the computed current ratios, we can see that the liquidity of the company is being affected

throughout the years. The current ratios of KNM of year 2004-2008 are 3.18, 1.52, 1.16, 1.29 and 1.01

respectively. The decrease pattern is due to the undergoing expansion of the company towards being the

top 10 biggest player in the O&G industry.

The liquidity ratios show that how the company could pay its short-term obligation. The company has

undergoes a vast expansion throughout the year 2004-2008. Due to the competitive industry of O&G, the

company is committed to pursue the company’s objective. Due to this, the current ratios drops 52.26

%(2005), 23.80 %(2006), 11.26 %(2007) and 21.71 %(2008). From the investor’s point of view, they

prefer higher ratios as it show the solvency of the company.

The collection periods of the company are decrease due to the huge projects in hands. The early

collections of payments are highly needed and the management did a good job on running the business as

the days decrease. This is to make sure that the payment due did not exceed its time; thus jeopardize the

cash flows of the projects. The company’s inventory is selling like hot cakes as the demand for the O&G

equipment are high. The average days in inventory during 2004-08 are 17.90, 7.93, 7.46, 17.16 and 15.74

respectively. This could be the reason why KNM bought a lot of stakes in other company as there are in

need of increasing supply of equipment. The technological advancement transferred from the buyouts

benefited the company which shows in the increase of demand as KNM are being trusted buy Oil

companies such as Petronas, Petbras, Exxonmobil, shell and ect.

In the short-term, we see that the company’s performance have been affected by the heavy bought of

expansion. It could jeopardize the solvency of the company to run in the short period. However the

expansion of the company will see the results in 2009-2010 as the economy are slowly booming after the

sub-prime crisis. In the long-run the company is solvent enough to run and with the well manage by the

management, the company’s objective could be achieved.

Capital Structure and Solvency Analysis

2004 2005 2006 2007 20080.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

Total debt to equity

2005 2006 2007 2008

-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

Total debt to equity Growth

Total debt to equity ratios for the analysis years shows that the ratios are decrease over the years of 04-07

before increase in the following year. The reason behind the ratio lies on the massive expansion of the

company throughout the respective years;

During 2004, KNM acquired a stake in FBM-Hudson Italiana SpA’s plant in Dubai and secured

the exclusive marketing and manufacturing rights for FBM’s products in South-East Asia and

China.

In 2004-05 KNM increase the production of O&G equipment in Kuantan, Gebeng, China and

Jaber Ali Dubai. Plan to invest 135mil in building new plant and plant expansion.

In 2006, having 1.6bln in hand it increase the production to 115000 metric tons. It acquired

VPSB (virgo Pulse Snd Bhd) for RM28mil. It is the leading manufacturer of industrial boilers

and heat recovery steam generators (HRSG). It acquired the whole stake in FBM for another

RM7.9mil

In 2007, it increase the production to 146000MT and fully utilized all the plant. It made a PPE

investment worth 258mil in year 07, KNM’s latest partnership is with Prosernat SA of France.

In 2008, KNM acquire Borsig GmbH for 1.7bil and In January and KNM proposed to buy a

100% stake in mid-sized Belgium-based process equipment maker Ellimetal NV for another 20

million euros (RM97mil) while having RM4.7bil worth of order book value.

The increase in the ratio in 2008 is because of KNM lower down the debts in hand as it received

payments from the previous projects in hand. The company paid cash on acquiring Borsig GmbH

which worth Rm1.7bil. Long-term debt to equity is in the decreasing manner as it made a vast

expansion throughout the 5 years. Investors are being skeptic on how the company will pay it long

term debts and it undergoes a selling craze of shares in 2008. The times interest earned ratio shows

that the company’s performance are increase through 2004-07. But due to the crisis that falls on

2008, it affects the earnings of the company.

In the long run the company is doing well in the long run and might achieve its goal. However the

company needs to remain competitive to gain new projects in the future as to remain solvent in the

long run and the ability to pay its long term obligations.

Return on Investment Analysis

2004 2005 2006 2007 20080.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

ROA(%) ROE(%)

2005 2006 2007 2008

-100.00%

-50.00%

0.00%

50.00%

100.00%

150.00%

200.00%

ROA(%) ROE(%)

From the graph, it shows that both ROA and ROE are in the increase manner from 2004-07. The heavy

expansion and increase in production of O&G equipment have showed and increment of more than 150%

in ROA and more than 100% in ROE in 2005. However the ROE of the company is below the industrial

average of 25.4x*. The CAPEX that are being use to expand the production really shows its results. But

during the 2008 the amount of return on both ratios are drops significantly due to the sudden bird flu

outbreak. It scared off the investors and potential buyers as the economy are badly affected.

Due to the high in ROE, the company achieved the corporate goal which is to maximize the shareholder’s

wealth. But the company should consider investing more into the profitable projects and expand its scope

of works to increase its ROA.

*refer to appendix

Operating Performance Analysis

2004 2005 2006 2007 20080.00

5.00

10.00

15.00

20.00

25.00

30.00

Gross profit margin(%) Operating profit margin(%)

2005 2006 2007 2008

-100.00%

-50.00%

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

300.00%

Gross profit margin(%) Operating profit margin(%)

Gross profit margin and operating profit margin of KNM is somehow quite stable, this is due to the

continuously projects that are being awarded to the company. The projects are drives by the heavy

CAPEX by the oil companies as the industry is booming. KNM most projects come from the oil sand

development in Canada, several LNG pipeline projects in Australia, Brazil, middle east countries such as

Egypt and many others. The profitability of the company is assured as by the end on 2008, it has Rm4.7

bill worth of projects in hand. Incomes of the company are approved throughout 2004-07 as it can be seen

from the net profit margin ratio. The company’s expansion and acquired stake have improved the

profitability of the company as it capture the market percentage. KNM which accounts for 1.2 percent of

the world demand in O&G equipment and services, have shown its ability to achieve to be among top 10

main players in the industry.

Assets Utilization Analysis

2004 2005 2006 2007 20080.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

Cash turnover

2005 2006 2007 2008

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

Cash turnover growth

The cash turnover ratio shows the ability of the company efficiently use the cash resources to generate

income. The company is efficiently handling its cash and it reflects on the computed ratio. The company

which used up the cash for expansion really profits the company and it shows in the growing net income

of the company. Even though the buyouts of other companies and expansions did affect its long and short

term liquidity, it shows that the buying the act of doing so benefited and maximized the efficiency of the

company in generating profits.

Inventory turnover which shows that the company needs to improve the production as it will leads to loss

of opportunity. The company which have expand and increase the capacity of the production might still

loose as the high demand in O&G equipment.

Overall the performance of the company is good even though the vast expansion and increasing capacity

made by KNM affects the short-term solvency. But in the long-term run, the profitability and the

solvency of the company will enhance as the energy industry has the most percentage of growth. The

company still have the growth opportunity as It has variety of business portfolio and strategies, in the

long-run investors should invest on the equity as it will expand further in the future.

Wah Seong Ratio Analysis

*Please note that we used http://www.securities.com/ch.html?pc=MY as source to check our ratios.

You can refer to the graph for all the calculated ratios in the appendix.

Wah Seong Financial Ratios

2004 2005 2006 2007 2008 AverageLiquidity Current Ratio 1.80 1.20 1.35 1.39 1.48 1.44Acid-Test 1.16 0.89 0.93 1.01 1.09 1.02Collection Period 101.82 119.56 100.62 101.82 104.69 105.70Days to sell inventory 63.58 53.31 55.96 46.85 46.85 53.31Capital Structure and Solvency Total debt to equity 1.35 1.36 1.25 1.00 0.86 1.16Long-term debt to equity 0.66 0.47 0.58 0.39 0.31 0.48Times interest earned 6.12 5.93 3.74 5.50 6.04 5.47Return on Investment ROA(%) 3.38 4.07 2.70 5.51 5.43 4.22ROE(%) 11.55 16.34 10.06 18.31 14.61 14.17Operating Performances Gross profit margin(%) 15.23 18.65 17.87 16.72 16.62 17.02Operating profit margin(%) 8.72 8.07 5.76 7.32 7.41 7.46Net profit margin(%) 3.40 4.27 2.30 4.41 4.93 3.86Assets Utilization Cash turnover 11.40 13.63 15.14 18.93 15.42 14.90Account receivable turnover 3.01 3.54 3.58 3.59 3.31 3.41Inventory turnover 5.53 6.66 6.55 7.68 7.68 6.82Working capital turnover 4.64 8.10 9.66 7.93 6.73 7.41PPE turnover 3.26 4.03 4.48 6.05 5.30 4.62Total assets turnover 0.99 0.95 1.17 1.25 1.10 1.09

Growth of Wah Seong Financial Ratios

2005 2006 2007 2008Averag

e

Liquidity

Current Ratio -33.33% 12.50% 2.96% 6.47% -2.85%

Acid-Test -23.28% 4.49% 8.60% 7.92% -0.56%

Collection Period 17.42% -15.84% 1.19% 2.82% 1.40%

Days to sell inventory -16.15% 4.97% -16.28% 0.00% -6.87%

Capital Structure and Solvency

Total debt to equity 0.74% -8.09% -20.00% -14.00% -10.34%

Long-term debt to equity -29.18% 24.68% -33.05% -20.31% -14.46%

Times interest earned -3.02% -36.95% 47.06% 9.80% 4.22%

Return on Investment

ROA 20.41% -33.66% 104.07% -1.45% 22.34%

ROE 41.47% -38.43% 82.01% -20.21% 16.21%

Operating Performances

Gross profit margin 22.46% -4.18% -6.44% -0.60% 2.81%

Operating profit margin -7.45% -28.62% 27.08% 1.23% -1.94%

Net profit margin 25.59% -46.14% 91.74% 11.79% 20.75%

Assets Utilization

Cash turnover 19.54% 11.12% 25.03% -18.54% 9.29%

Account receivable turnover 17.51% 1.20% 0.45% -7.90% 2.81%

Inventory turnover 20.43% -1.65% 17.25% 0.00% 9.01%

Working capital turnover 74.57% 19.31% -17.98% -15.09% 15.20%

PPE turnover 23.54% 11.23% 35.05% -12.42% 14.35%

Total assets turnover -4.04% 23.16% 6.84% -12.00% 3.49%

Liquidity Analysis

As it is known that the liquidity ratios shows the ability in handing the short term financial obligations by

the information provided from the financial statement and the balance sheet. As the calculations for the

liquidity ratios for Wah Seong company shows, the company current ratio was at the highest level in 2004

where it was 1.8:1 which means that the company’s current assets is 1.8 to the 1 of the company’s current

liability, where with the movement of the years we can see that this current ratio is decreasing from year

to year when as we can see that in 2005 it dropped by 0.6 to become 1.2:1 which was the worst year

among the last 5 years and that was because of the increasing in the current liability in that year and then

cu r r e n t Ratio

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

1 2 3 4 5

y ea r

it started to grow by the years after to 1.35:1 in 2006 until it reaches to 1.48:1 in 2008 where the current

assets did increase.

Moving to the other ratio we have here we will find the quick ratio for the company where this ratio

shows us the relation between the company’s most liquid assets to its liabilities where the higher is the

better where in this ratio we exclude the inventory from current assets because it takes tims for the

company to turn the inventory into cash (inventory to A/C receivables to cash), and by looking at the last

5 years for the company we will find out that the best year was in 2004 as well where it was 1.16:1

comparing it with the last year which is 2008 which the ratio was 1.09 where that happened in the current

ratio as well where it was because of the decrease in the current assets and increase in the current

liabilities. So by looking at the graph and the dates (in the appendix) we will find that the worst was in

2005 where it was 0.89:1 where the current liabilities was higher than the current assets after excluding

the inventories from the current assets which shows some differences.

The main reason for decrease in current and quick ratio of Wah Seong is increase in short-term

borrowings for fast expansion of business.

Collection period shows the period from point of sales to the point that the company will collect their

money, so if look at our company we will see that the best year was in 2006 where the company was able

to collect the money in 100.62 days. And before thinking about when to get the money back the company

should know in how many days they are going to sell all their inventories so by looking at the day to sell

inventory ratios we will find that the fasts year that the company could sell its inventory was in 2007 and

2008 where the company could sell its inventory in 46.85 days and that was the best in the last 5 years.

In conclusion we can say in terms of liquidity analysis ratios the company had lots of fluctuation up and

down where it was at the best in 2004, and then it started to grow up again in 2007 and 2008. The

company could decrease the number of the days to sell its inventory in the last 5 years, and there was

increase in the number of the days to collect the money back.

The Capital Structure and Solvency Analysis

lo n g te ar m d e b t to e q u ity

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

1 2 3 4 5

y ea r

Going a step forward to the capital structure and solvency by doing the total debt to equity ratio which

show as what proportion the equity and debt the company is using to finance its assets, so if the ratio is

greater than one means assets are mostly financed with debt, and if it was less than one it means that the

equity provides a majority of the financing, so by looking at the result for the last 5 year we will find that

since 2004 until 2007 it was either one or more than one until the last year 2008 we will find that it

dropped to 0.86 where it was 1 in the year before (2007) and that drop was because of the increase in the

equity which means that the assets are financed by equity. Considering long term debt to equity ratio

which is showing or judging the company dept over the equity, by looking at the years of 2004 until 2008

we will find that it’s all below 1 where in 2004 it was 0.66 and in 2005 it was 0.47, and it shows that

shareholder equity is higher than the long term debt and that decrease could be because of selling some

assets and that would be the reason of decreasing the debt.

Return on Investment Analysis

Going after the capital structure and solvency we find the return on investment where we have the return

on assets and the return on equity, taking it one by one the return on assets where it indicates what return

a company is generating on the firm’s investment assets, ROA of our company in the last 5 years it shows

us that the highest rate was in 2007 and the rate was 5.51 and the lowest rate was in 2006 which was 2.70.

After that we move to the retune on equity (ROE) which indicates what return a company is generating on

the owner’s investment, (ROE) is also referred to as stockholder’s return on investment, it tells as that the

rate that shareholders are earning on their shares, and by looking at our company we will find that the

highest rat was 18.31 in 2007 which was also the highest rate on the (ROA) as well and looking at the

lowest rate will find that is accurse in 2006 at a rate of 10.06.

So we can say that the company return on assets was moving up and down in the last 5 years and the

return on equity was high in rat in the year 2004 and 2008 as well.

Operating Performance Analysis

ye ar s

3.384.07

2.70

5.51 5.43

11.55

16.34

10.06

18.31

14.61

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

1 2 3 4 5

year

ROA

ROE

o p e r at io n p r o fit m ar g in

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

1 2 3 4 5

year

Gross profit margin which it used to assess the company financial performance by revealing the

proportion of the money left over from revenues after accounting for cost of goods sold over the total

revenue. By looking at our company we will find that the highest rate was in 2005 which was 18.65% and

the lowest was in 2004 which was 15.23% and that was because of the small amount of differences

between the sales and the cost of the good sold in that year which was (Rm757773K & RM643139K)

where you can see that the differences about (RM 114634K).

Operating profit margin which is measuring the company pricing strategy and operating efficiency, and

shows how much the company is making on each Ringgit of sales, so by looking at the performance of

our company in the last 5 years we can see that the highest rat was 8.72% in 2004 where the sales for that

year was (RM757773K) and the lowest was 5.76% in 2006.

The last one is the net profit margin which shows how much of each Ringgit earned by the company is

translated into net profit, so by looking at our company we will find that our company performance in the

last 5 years, and the highest was in 2008 which was 4.93 with a great net income and the lowest was in

2006 which was 2.30 because of the low net income.

Assets Utilization Analysis

Assets utilization, we have done a 6 ratios to judge on the assets utilizations, first is inventory turnover

which shows how many times a company’s inventory is sold and replaced over a period, the highest was

7.68 in 2008 in the last 5 years and the lowest was in 2004 which was 5.53 and the cost of good sold was

(RM643139k).

w o r k in g cap ital tu r n o ve r

0.00

2.00

4.00

6.00

8.00

10.00

12.00

1 2 3 4 5

y ea r

Total assets turnover, this ratio is useful to determine the amount of sales that are generated from each

dollar of assets, so by looking at the last 5 years we can find that the highest was 1.25% in 2007 and the

lowest was in 2005 which was 0.95% where the total assets was (RM762952k) for that year.

The cash turnover ratio where it shows how efficiently a company using the cash to get the income, so by

looking at our company we will see that the rate was increasing from 2004 until 2007 and that was

because of the increase in the sales for those years.

Working capital turnover ratio for our company was increasing in the since 2004 until 2006 and it reached

to 9.66. In 2007 and 2008 there was a decrease that was due to the increase in the average working

capital.

In conclusion we can see that the assets utilization and the performance for the company is good compare

with the market and it sales is increase by the years which will help them a lot to move on in the future.

Intercompany Evaluation

In intercompany evaluation the total risk and profitability are compared considering both, the average of

ratio percentage and growth along with ratios of last year of operation (2008) to see what has been the

performance of each company within these years.

Liquidity

In terms of current (2008) liquidity ratios, Wah Seong has higher current and quick ratio of 1.48 and 1.09

compare to KNM’s 1.01 and 0.95 as well as better collection period of 104 day in contrast to KNM’s 128

days. But KNM much in better than Wah Seong considering days to sell inventory ratio of 15 days

compare to 46 day’s of Wah Seong.

In view of average figures, we will see that the situation is different and KNM has a better average

current, quick and days to sell inventory ratios and Wah Seong is better in terms of collection period. This

in consistency between average and 2008 figures of current and quick ratios happened as result of better

(or less worse as they both have negative growth) average growth of Wah Seong over the past 5 years.

Therefore in general we can conclude that Wah Seong has more capacity to meet its short-term

obligations as result of better liquidity ratios. But it is also considerable that KNM has a very short days

to sell inventory ratio. Un fortunately both of the companies have a negative average growth rate of main

liquidity ratios which indicates that their ability to pay their short term debt reduced over time as result of

increase in their short term borrowings and debt.

*please refer to Appendix for the graphs related to liquidity ratios comparison.

Capital structure and Solvency

Considering the current (2008) as well as overall (average) position (measured by ratios) of both

companies relative to their ability to pay pack their long-term debt, KNM is slightly in better position

compare to Wah Seong. KNM has somewhat safer total debt to equity of ratio (0.79) compare to Wah

Seong (0.86) in 2008. This slighty safer position us also supported by KNM’s higher times interest earned

ratio of 7.91 against Wah Seongs’s 6.04.

But in terms long-term debt to equity ratio this relationship is opposite and Wah Seong maintain a slightly

better figure 0.31 verses KNM’s 0.42.

It is also important to notice that KNM maintained a much better average rate of growth in times interest

earned of 13.24% against Wah Seong’s 4.22% during the past 5 years. Please notice that all of the above

arguments are also supported by average ratio figures of 2004 to 2008.

In general we can conclude that KNM is slightly less levered compare to Wah Seong and it is somewhat

safer (more able) in terms of ability to meet its long-term obligations (solvency) considering both last

year of rations and the average of past 5 years. This makes KNM more attractive to long-term creditors

and lenders.

Return on Investment

ROA Graphs

2004 2005 2006 2007 2008

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

KNM Wah Seong

2005 2006 2007 2008

-100.00%

-50.00%

0.00%

50.00%

100.00%

150.00%

200.00%

KNM Wah Seong

The ROA shows how companies efficiently handling money to generate profit. From the graft we see that

KNM performs better than Wah Seong as it shows tremendous increment throughout the years. The

expansion plan really did increase the profitability of the company. While Wah Seong’s earnings ROA

shows some fluctuation, this shows that the ability of the company to efficiently generating profits could

be question. The industry is booming while Wah Seong’s ROA does not reflect the actual situation as

KNM did. The management needs to come up with a plan to expand to the company as it needs to remain

competitive even though it is the largest pipe coating company in Asia. The company needs to venture

into new projects or other products. The needs to diversify their portfolios are crucially needed and the

company might lose the opportunity in the booming industry.

ROE Graphs

2004 2005 2006 2007 20080.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

KNM Wah Seong

2005 2006 2007 2008

-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

KNM Wah Seong

Apart from the ROA, ROE show how management uses the source of shareholder’s equity to generate

profit. Based from the ROE above, we can see that the return that KNM is generating more than what

Wah Seong did. During 2005 we see that the expansion plan made by KNM have made the ROE growth

more than 100%. The momentum of the growth, grow steadily until 2007 before falls on 2008 due to the

acquiring of Borsig GmbH and the bird flu outbreak. However, with the total of RM4.6bil worth of

projects in hand, KNM expected to grow in 2009. Wah Seong on the other side sees the fluctuation in the

ROE. In investors view, Wah Seong is less likely to be affected to the global downturn whereas KNM

survived through all cycles of economy. Wah Seong again, in needs to explore new opportunity into new

business portfolio as to expand like other player in the market and embark into new products and

technological advancement.

Operating performance

Gross Profit Margin for KNM and Wah Seong is 27.93% and 16.62% respectively. Meaning that RM1 of

KNM sales generates RM0.2793 of gross profit, whereas Wah Seong is less competitive at this point,

generating RM0.1131 less than its major rival. But for more reliable comparison we consider the average

of 5 years, 2004 throughout 2008. In that case 24.09% vs 17.02%, which proves stable comparative

advantage of KNM Sdn Bhd, which is obviously sustained by minimizing cost of sales.

In terms of operating profit margin KNM has 20.23% vs. Wah Seong’s 7.41%. And again Wah Seong

didn’t manage to reduce its operating expenses in order to boost its operating gains, leaving its indicators

2.73 times less behind KNM. Average of 5 years of operating profit margin shows 17.75% vs. 7.46%,

corresponding to RM0.1775 operating gain from RM1 of sales of KNM and RM0.0746 operating profit

from RM1 of sales of Wah Seong.

And finally, arriving to Net profit margin evaluation, the gap between KNM and Wah Seong indicators is

drastic: 13.30% vs. 4.93%. This shows that KNM is 2.7 times more effective in generating profits when it

comes to net gains. Well, as we can see the financing gain and cost is almost at the same percentage level

of sales, as the 2.7 proportion difference in net profit margin after 2.73 difference when calculating

operating profit margin. Thus, we can conclude that financing activities are almost equally efficient. Net

profit margin outlook for last 5 years shows is as follows: KNM performing at 12.71% vs. 3.86% of Wah

Seong.

In General, we can say that KNM shows better overall operating performance compared to Wah Seong

Sdn Bhd, whether analyzed based solely on financial indicators or on average indicators for last 5

financial years (2004-2008).

Asset Utilization

2008 Average Growth

Assets Utilization KNMWaseon

g Difference KNM Waseong Difference KNM Waseong Difference

Cash turnover 8.14 15.42 -7.28 12.82 14.90 -2.08 -2.80% 9.29% -12.09%

Account receivable turnover 2.81 3.31 -0.50 2.55 3.41 -0.86 17.43% 2.81% 14.62%

Inventory turnover 22.87 7.68 15.19 31.53 6.82 24.71 21.14% 9.01% 12.13%

Working capital turnover 29.65 6.73 22.92 13.75 7.41 6.34 83.56% 15.20% 68.36%

PPE turnover 4.20 5.30 -1.10 2.91 4.62 -1.71 26.29% 14.35% 11.94%

Total assets turnover 0.57 1.10 -0.53 0.79 1.09 -0.30 7.90% 3.49% 4.41%

Considering historical and current (2008) efficiency in use of assets, Wah Seong is more

successful than KNM as it has a higher current and average cash turnover, account receivable

turnover, PPE turnover and total asset turnover ratios. But KNM maintain a higher working

capital and inventory turnover ratio which means that the company generate sales with lower rate

of working capital compare to Wah Seong. This difference is substantial, especially in 2008

whereby KNM has Ratio of 29.69 versus Waseong 6.73.

In terms of growth in asset utilization ratios though, KNM shows strong progress. KNM poses

higher average rate of growth in all asset utilization ratios except cash turnover.

In general we believe that in terms of asset utilization, Wah Seong is currently in better position

as indicated by its higher recent and average ratios. But considering the future of these

companies considering their efficiency in use of their assets in producing revenue, KNM has a

better chance assuming that it maintains its high rate of growth over time.

Prospective Analysis

In our prospective analysis, we are following the ultimate objective of estimating the company’s intrinsic

value. Therefore the only forecasted financial statement that we need is the income statement.

To prepare the forecasted income statements we based our estimation on historical data and ratios of the

income statement for the year ended 31st December 2008 for both KNM and WahSeong. Please note that

we generated the estimated income statement for period of 5 years (2009-2013).

KNM Group Berhad (7164)

KNM Forecasted Income Statement in RM'000 Estimate

d 2008 2009 2010 2011 2012 2013

Revenue 1 2528750

5198352

10686255

21967740 45159093

92833567

(-)Cost of sales 3 1810588

3746226

7701119 15831194 32544192

66901109

Gross profit 2 706390 1452126

2985137 6136546 12614901

25932458

(-)Other expenses & earnings 4 194858 400570 823451 1692769 3479826 7153480

Operating Profit 5 511532 1051557

2161685 4443777 9135075 18778978

(-)Interest cost/income 6 57811 310974 373168 447802 537362 644835

Profit before tax 7 453721 740583 1788517 3995975 8597713 18134143

(-)Tax expenses 8 117489 191771 463128 1034740 2226339 4695754

Net income 9 336232 548812 1325389 2961236 6371374 13438389

Selected Ratios Sales Growth 105.57%Gross profit margin 27.93%Other expenses & earnings / Sales 7.71%Interest / Prior-year Total debt* 21.74%Income tax / Pretax income 25.89%

Note: All of the calculation is done in Excel; the file is in the cd attached to the report as appendix.

1- Forecasted Sales: Previous year sales x (1 + sales growth rate)

2-Gross profit: F sales x Gross profit margin ratio

3-Cost of sales: Forecasted sales – Gross profit

4-Other expenses & earnings: F sales x (Other expenses & earnings /sales) ratio

5-Operating profit: Gross profit – Other expenses & earnings

6-Interest cost/income**: Beginning year interest bearing debt x (interest/prior- year total debt*)

7-Profit before tax: Operating profit – (Interest cost/income)

8-Tax expenses: Profit before tax x (Income tax/ pretax income)

9-Net income: Profit before tax – Tax expenses

* We used (interest/Prior-year Total debt) ratio instead of (interest/Prior-year Long-term debt)ratio

because we realized that most of the financing cost and interest paid by company which is reflected in

Income statement as interest expenses is related to short-term borrowings and not the long-term.

Therefore we believe that using the Interest to total debt ratio is more relevant and realistic to forecast the

company’s future interest payments.

** As you may noticed KNM has an unusual rate of growth in sales (more than 100%) for the past years.

Looking at the details of the financial statement you will see that this high rate of growth is backed up by

relatively high cash inflow in to the company which is either raised by share issue or more borrowing.

Therefore we assumed that the amount of interest-bearing debt of the company will rise at the average

rate of 20% per year. We believe that this modification will make the future forecast of the company’s

income more realistic.

Intrinsic Value – In case of KNM we can‘t simply discount back future net income assuming that the net

income will grow at the same rate as 2013. This company had a tremendous rate of growth which is way

above industry (any industry) average. If you look at the details of the past financial statements, you will

see that this growth is highly supported by increase in equity (especially issue of new shares). Therefore if

we simply discount back forecasted net income we will get and intrinsic value illogically above the

current price of the share and the result won’t be realistic.

The correct method of calculating the Intrinsic value of KNM in to discount back the future return above

the required rate of return of the future common equity (also called residual income) for each future

period and then add cumulative present value of residual incomes to beginning book value of equity to get

the current fair value of the company’s equity. Unfortunately this process requires lots of calculation and

can’t be done under scope of this report. Therefore we will try the qualitative method instead of

quantitative.

One thing that is obvious about the KNM is that the company’s share price is (probably highly)

undervalued as the companies major share holders insist on delisting the firm as they believe that the

market price of the company’s share should by way above the current price of RM0.73( as at 5/4/2010) .

But how much is the fare value of the shares, we need to undergo the complicated calculation explained

in above paragraph. In terms of decision making (buy, sell, hold), we suggest that investors have to BUY

this share as it is highly undervalued.

Wah Seong Corporation Berhad (5142)

Wah Seong Forecasted Income Statement in RM'000

Estimated

2008 2009 2010 2011 2012 2013Revenue 1 2343194 2815509 3383028 4064942 4884308 5868832(-)Cost of sales 3 1953667 2347466 2820642 3389195 4072352 4893212Gross profit 2 389527 468044 562387 675746 811956 975621(-)Other expenses & earnings 4 211992 254723 306067 367761 441890 530961Operating Profit 5 177535 213321 256319 307985 370066 444659(+)Earning in equity* 5723 Nil Nil Nil Nil Nil(-)Interest cost/income 6 30345 40763 46062 52050 58817 66463Profit before tax 7 152913 172558 210257 255935 311249 378196(-)Tax expenses 8 19864 22416 27313 33247 40432 49129Net income 9 133049 150142 182944 222688 270816 329067Selected RatiosSales Growth 20.16%Gross profit margin 16.62%Other expenses & earnings / Sales 9.05%Interest / Pre-year long-term debt 12.97%Income tax / Pretax income 12.99%

Note: All of the calculation is done in Excel; the file is in the cd attached to the report as appendix.

Please notice that Item 1, 2, 3, 4, 5, 8 and 9 are calculated based on the same formula as KNM company.(please refer to above notes to see the details of calculations)

6-Interest cost/income**: Beginning year interest bearing debt x (interest/pre- year Long-term debt)

7-Profit before tax: Operating profit + Earning in equity* – (Interest cost/income)

*As earning in equity is not a recurring item (and there is no benchmark to forecast), we assumed that this

item will be zero for forecasted periods.

**the amount of long-term debt of company had an average growth of 13% during the past 5 years.

Therefore we assumed that Wah Seong continue to have the same amount of growth in long-term debt for

future periods. Interest calculation is based on this assumption.

Intrinsic Value – For calculating the intrinsic value of Wah Seong we assume that the company’s future

earnings after 2013 will grow at the rate of 10.52% (expected growth in earnings= g = Retention Ratio x

ROE = 0.72 x 14.61 = 10.52%).

Considering the discount rate for these calculations, we believe that the simple interest rate announced by

Bank Negara Malaysia is not a proper benchmark because investing in stock market is much more risky

than fixed deposits and interbank loans. Therefore we use the Oil and Gas industry average ROE equal to

25.9% as discount rate (please refer to the article “Sector focus Malaysia Oil and Gas” in the appendix).

Value of equity

¿ BV of Equity2008+ Net income2009(1+k )1 +…+ Net income2013

(1+k )5 +Net income 2013×(1+g)

( k−g )× (1+k )5

¿¿

Fair value of equity

¿953,754+ 150142(1+0.259)1 +

182944(1+0.259)2 +

222688(1+0.259)3 +

270816(1+0.259)4 + 329067

(1+0.259)5 ++329067×(1+0.1052)

(0.259−0.1052 )× (1+0.259 )5

¿=RM 1,748,158K ¿

Intrinsic (Fair) value of each share ¿Fair value of Equity

Number of shares outstanding=1,748,158,000

657,000,000=RM 2.66

As indicated by our calculation the approximate fair price of Wah Seong Company should be around

RM2.66. Compare to current market price of RM2.69 (as at 2/4/2010) the share may slightly be

undervalued. But in general, considering the probable error in our calculation we can conclude that the

market price of this share represents its fair price and in terms of decision making (buy, sell, hold) we

believe that the investors have to HOLD their shares hoping for increase in prices.

Conclusion

KNM Group Berhad and Wah Seong Corporation Berhad are both one of the major competitors of oil and

gas industry. Considering the past 5 years they have both a substantial increase in their short term

borrowings in order to expand their activities which resulted in decrease of their liquidity.

Considering creditors point of view and risk analysis, Wah Seong is in better position to meet its short

term obligations but KNM is less levered compare to Wah seong which makes it more attractive for long-

term creditors (like bond holders) as it has more capacity to pay its long-term liabilities.

In terms of profitability and from the investor’s point of view, we can conclude that in general KNM is in

better position as it has better return on investment and operating performance ratios along with much

better growth in Asset utilization ratios over time.

As it comes to the ultimate objective of this report which is estimating the intrinsic value of each

company’s share, our finding somehow supports the statement regarding the profitability of the

companies.

In Case of KNM we know that currently it is highly undervalued as the major share holders arguing about

delisting the company. We didn’t calculate the intrinsic value of the shares as the company’s constant

unusual growth in earning is highly supported with increase in common equity and it won’t be realistic if

we simply discount back the future earnings of the company.

On the other hand our calculations regarding the Wah Seong intrinsic value shows that the current market

price of the company is very close to the company’s fair value. Hence perhaps it would be best for

investors to HOLD their shares.

Therefore in general, we conclude that KNM is in better position compare to Wah Seong. Although the

company’s share price been controversial, but KNM would be profitable BUY decision specially for

passive (buy and hold) investors. As we believe that sooner or later the market share price of KNM will

reflect its fair value resulting from company’s strong performance.

Appendix

KNM Graphs

Liquidity

2004 2005 2006 2007 20080.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Acid-Test

Acid-Test

2005 2006 2007 2008

-60.00%

-50.00%

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

Acid-Test

Acid-Test

2004 2005 2006 2007 20080.00

50.00

100.00

150.00

200.00

250.00

Collection Period

Collection Period

2005 2006 2007 2008

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

Collection Period

Collection Period

2004 2005 2006 2007 20080.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

Days to sell inventory

2005 2006 2007 2008

-100.00%

-50.00%

0.00%

50.00%

100.00%

150.00%

Days to sell inventory

Capital Structure Solvency

2004 2005 2006 2007 20080.00

5.00

10.00

15.00

20.00

25.00

Times interest earned

2005 2006 2007 2008

-80.00%

-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

Times interest earned Growth

Operating Performance

2004 2005 2006 2007 20080.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

Net profit margin

Net profit margin

2005 2006 2007 2008

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

Net profit margin

Net profit margin

Assets Utilization

2004 2005 2006 2007 20080.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Account receivable turnover

2005 2006 2007 2008

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

Account receivable turnover

2004 2005 2006 2007 20080.00

10.00

20.00

30.00

40.00

50.00

60.00

Inventory turnover

Inventory turnover

2005 2006 2007 2008

-100.00%

-50.00%

0.00%

50.00%

100.00%

150.00%

Inventory turnover

Inventory turnover

2004 2005 2006 2007 20080.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

Working capital turnover

Working capital turnover

2005 2006 2007 2008

-100.00%

-50.00%

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

300.00%

Working capital turnover

Working capital turnover

2004 2005 2006 2007 20080.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

PPE turnover

PPE turnover

2005 2006 2007 2008

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

PPE turnover

PPE turnover

2004 2005 2006 2007 20080.00

0.20

0.40

0.60

0.80

1.00

1.20

Total assets turnover

Total assets turnover

2005 2006 2007 2008

-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

Total assets turnover

Total assets turnover

Wah Seong Graphs

1 2 3 4 5

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

acid-Test

year

1 2 3 4 5

90.00

95.00

100.00

105.00

110.00

115.00

120.00

125.00

collection period

year

1 2 3 4 5

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

days to sell invetory

year

1 2 3 4 5

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

total debt to equity

year

1 2 3 4 5

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Net profit margin

year

1 2 3 4 5

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

Gross profit margin

year

1 2 3 4 5

2.70

2.80

2.90

3.00

3.10

3.20

3.30

3.40

3.50

3.60

3.70

account receivable turnover

year

1 2 3 4 5

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

times interst earned

year

1 2 3 4 5

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

cash turnover

year

1 2 3 4 5

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

inventory turnover

year

Liquidity Comparison of KNM and Wah Seong:

1 2 3 4 5

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Current ratio

KNM WOHSeong

year

1 2 3 4 5

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Acid-TEST ratio

KNM WOHSeong

year

1 2 3 4 5

0.00

50.00

100.00

150.00

200.00

250.00

Collection period

KNM WOHSeong

year

1 2 3 4 5

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

Days to sell inventory

KNM WOHSeong

year

1 2 3 4 5

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

PPE turnover

year

1 2 3 4 5

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

Total assets turnover

year