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HLBank Research Highlights

Author: HLInvest   |   Latest post: Tue, 19 Mar 2019, 4:54 PM

 

George Kent (Malaysia) - Aspiration in Metering

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LRT3’s main works like stations and viaduct line have halted as the project is in redesign stage. We understand that the project will only be back to full swing in 2HCY19. We opine that share of results from LRT3 might record a loss for Gkent in upcoming quarter results. This is deduced from the fact that MRCB recorded a loss of RM7.8m in share of JV contribution in its 4Q18 results and most of the JV contribution is from MRCB-Gkent JV. One possibility of the potential loss could be reversal of construction profits due to downwards adjustment of contract value. Maintain forecast and HOLD with unchanged TP of RM0.97.

We Met Up With the Management of Gkent Recently With the Following Key Takeaways:

LRT3. Construction costs of LRT3 has been revised downwards to RM16.63bn (from RM22.5bn) with a fixed price contract model. Main works like stations and viaduct line have halted as the project is now in redesign stage. We understand that the project will only be back to full swing in 2HCY19. We opine that share of results from LRT3 might record a loss for Gkent in the upcoming quarter results, due for release this month. This is deduced from the fact that it’s JV partner MRCB recorded a loss of RM7.8m in share of JV contribution in its 4Q18 results and most of the JV contribution was from the MRCB-Gkent JV. One possible reason for the potential loss could be reversal of construction profits due to downwards adjustment of contract value.

Potential construction jobs. Focus on potential jobs would be on regional rail related opportunities and Gkent is studying on possibilities to participate in Singapore’s rail related job bidding. We opine that the company would face an uphill battle as bidding for SMRT jobs are very competitive in Singapore. For the domestic front, near term opportunities for Gkent would be water treatment plants jobs (RM100- 200m) and the Klang Valley Double Track 2 (RM5bn) where we understand that the company is looking for a JV partner to participate in the tender.

Smart meters. Gkent’s automated meter reading solution (a.k.a. smart meters) is undergoing pilot testing in several states with commercialisation set for CY19. We opine that the sales of smart meters will benefit from the government’s effort to curb non-revenue water (NRW) given their ability to provide customers with real -time access to water consumption data for billing and monitoring consumption patterns and detect leakages in the water supply system.

Outlook. Gkent is targeting to grow profit contribution from Its metering division to 50% (from 20%) in the short term and to 75% in the longer term given the slowdown in the domestic rail construction industry. The company is looking for potential M&A opportunities and also may form strategic alliances to expand geographical markets and diversify products range.

Forecast. Maintained as the meeting yielded no major surprises.

Maintain HOLD, TP: RM0.97. Maintain HOLD rating with unchanged TP of RM0.97 Our SOP valuation for GKent is based on (i) NPV (WACC: 12%) for its engineering division with nil orderbook replenishment, (ii) 8x P/E for metering assuming no YoY growth and (iii) 20% discount to its net cash per share. Our valuation is based on bear case scenario for the company to reflect slowing mega rail job flows and earnings sustainability issue post completion of LRT3 which is expected in FY24.

Source: Hong Leong Investment Bank Research - 11 Mar 2019

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