KUALA LUMPUR: KNM Group Bhd managing director Lee Swee Eng’s selling of a 1.6% stake recently has raised eyebrows and concerns about whether he would continue to pare his interest in the oil and gas player.

Replying to queries by The Edge Financial Daily via SMS yesterday, he said the selling of the shares was a strategic placement. “The proceeds from it will be used to degear and clear up all the margin taken up during the rights issue,” he said, but mum on whether he would be selling more shares.

According to a Bursa Malaysia filing on Monday, Lee sold a total of 63.65 million shares representing a 1.6% stake in KNM between June 1 and 4 at prices ranging from 97.5 sen to RM1.02 apiece.

Lee still holds a 23.74% stake in KNM as at June 8, via direct and indirect interests. While there were no new filings on Bursa regarding substantial shareholding changes in KNM yesterday, the company did see a block of 10 million shares change hands off-market yesterday in a block deal, at RM1.03 per share.

The stock had hit a six-month high of RM1.06 last Friday. It was the most actively traded stock yesterday with 82.64 million shares done, closing one sen lower at RM1.03.

“We believe that the share sale may help to raise funds to redeem part of Lee’s holdings under a share margin account,” said HwangDBS Vickers Research in a report yesterday.

The research firm pointed out that in October last year, Lee had been forced to sell a portion of his KNM shares by CIMB Bank. It was the fear of margin calls that had caused the company’s share price to drop during that period.

“We understand that the shares (the block sold in October 2008) was under share margin financing. This time around, the share sale is not under forced selling but Lee has raised around RM64 million and this could be used to redeem his holdings,” said HwangDBS.

The recent rally in oil prices has spurred interest in stocks such as KNM. However, analysts are still mixed on the company’s prospects going forward.
In its May 29 report, Maybank Investment Bank downgraded its recommendation on the company to sell, citing earnings weakness ahead.

“While KNM’s 1QFY2009 core net profit of RM98.4 million was in line with our and market expectations, the sequential fall in sales and Ebit (earnings before interest and tax) has reflected a slowdown in orders,” said Maybank, which noted that KNM’s order book contracted by 9% quarter-on-quarter.

AmResearch still has KNM under review as at May 29 but noted that the group was currently tendering for RM18 billion worth of jobs worldwide.

“Unless the award of contracts improves significantly over the next two quarters, the existing order book could drop by RM1 billion by the end of FY2009,” said AmResearch.

HwangDBS is more optimistic on the company. It maintains a buy recommendation with a target price of RM1.15.

“The earnings recovery for KNM has improved following the recovery in crude oil price. We expect new orders to flow from the third quarter, on the back of sustainable oil price and improving economic conditions,” it said.

This article appeared in The Edge Financial Daily, June 10, 2009.