AFTER much deliberation by KNM Group Bhd about how it would seek to get back on track, especially in fixing its mounting debt, a decision has been made to flog off its prized asset.
The company is proposing to sell its wholly owned unit, Germany-based Borsig Group for €220.8mil (RM1.03bil).
The sale will require the vote from its shareholders at a soon-to-be convened EGM. The proposed sale seems to come in time for the group to resolve the issue of its high indebtedness.
Its circular to Bursa Malaysia says that 91% of the sales proceeds from Borsig or €188.87mil (RM874.23mil) will be channelled towards the repayment of KNM’s bank borrowings, which were used for project financing, capital investment and working capital.
Another €15.55mil (RM71.98mil) will be used for working capital and €3.45mil (RM15.97mil) to pay off the necessary costs that are associated with the deal.
As at Dec 31, 2021, its financial statement states that the group had total bank borrowings amounting to RM1.28bil.
If the sale goes ahead, KNM’s total bank borrowings are expected to shrink to RM391.53mil from RM1.28bil.
Its circular to Bursa Malaysia says that 91% of the sales proceeds from Borsig or €188.87mil (RM874.23mil) will be channelled towards the repayment of KNM’s bank borrowings, which were used for project financing, capital investment and working capital.
KNM says in its circular this would see its estimated gearing ratio to improve from 0.69 times as at the last practicable date (LPD) prior to the announcement to 0.31 times after the planned sale.
As of its latest reported financial statement, KNM’s gearing ratio was at 1.16 times on Dec 31, 2021, based on its total equity of RM1.11bil.
The issues surrounding KNM’s debt were highlighted earlier when it had defaulted on the principal payment of bonds that the group had issued in Thailand amounting to 2.78 billion baht (RM356.7mil), which had matured on Nov 18, 2021.
“Through this, KNM triggered the criteria prescribed in Paragraph 8.04 and Paragraph 2.1(f) of the Practice Note 17 (PN17) of Bursa Malaysia’s listing requirements,” the group says.
However, it is not classified as a PN17 company as of now due to a special exemption by Bursa Malaysia that was granted to all listed companies that would become PN17 company from July-Dec 2021.
Meanwhile, Borsig has zero gearing and with cash and cash equivalents amounting to €60mil (RM282.48mil) as at Dec 31, 2021.
Borsig also contributed €141.31mil (RM671.1mil) or 65.6% of the entire KNM group’s revenue in the financial year 2021 (FY21).
KNM says the proposed disposal will give it greater cashflow flexibility as it will ease the situation with its high indebtedness and will help it pivot to growing its renewable energy business.
“We will also improve our ability to obtain additional financing for future capital expenditure and/or strategic acquisitions as well as improve the bottom line by reducing finance costs with annual interest savings of RM85.02mil at an average annual interest rate of such borrowings of 9.73%,” it said.
Despite this, KNM would still be selling Borsig at a net loss of about RM490.55mil, its circular states.
KNM’s total equity would then also be reduced to RM1.27bil from RM1.86bil at the LPD.
The price tag represents an enterprise value-to-earnings before interest, taxes, depreciation and amortisation (EV-to-Ebitda) ratio of 5.73 times, which KNM says is within the range of the adjusted EV-to-Ebitda multiples of 2.85 times and 7.73 times that is accorded to the comparable companies.
It is also higher than the simple average EV-to-EBITDA of 5.29 times that was accorded to the comparable companies, it says.
KNM says it will still function despite the planned disposal and is confident of replacing the major financial contribution from the Borsig Group to its consolidated financials.
“The group shall continue its existing process equipment manufacturing business following the proposed disposal.
“We have identified the development of our product portfolio via joint ventures, technology licensing as well as in-house research and development to include higher value-added products and markets.
“This includes pressure vessels, heat exchangers and industrial boilers to help improve margins,” it says.
KNM adds that it will use a portion of the proceeds from the proposed disposal for working capital that will go towards its manufacturing of process equipment.
According to its circular, this amounts to RM66.94mil in working capital and will help the group develop its product portfolio.
It is also planning to expand its renewable energy industry through organic growth or through joint ventures as it would like to increase the revenue contribution of its renewable energy business to 50% eventually.
It will allocate RM5.04mil from the sales proceeds for operating expenses for its bio-ethanol plant in Thailand, including for utilities, purchase of crops and equipment maintenance.