News

• Wins track works for MRT2… MRT Corp announced that it has awarded the Sg Buloh-Serdang-Putrajaya line (MRT2) track works worth RM1.01bn to the 51:49 JV between China Communications Construction Company (CCCC) and GKent.

• …on a competitive tender. The competitive tender involved a total of 7 bidders and the CCCC-GKent JV had quoted the most competitive price and faired very well in the technical evaluation.

Comments

• Positive but not entirely unexpected. We highlighted the possibility of the JV winning the MRT2 track works during our initiation report earlier this month. Experience should not be an issue as (i) GKent had undertaken the Ampang LRT extension systems which also encompassed track works and (ii) construction giant CCCC has vast rail related track record. Generally, track works are undertaken at the later stage of the MRT construction cycle as the civil works need to be completed first. As such, we reckon that commencement of the track works is likely to happen sometime in 2019 (FY20 for GKent). At a 49% stake, GKent’s share of works out to be RM495m.

• More job wins to add on? We do not discount the possibility of more job wins to GKent for the remainder of the year. In particular, we understand that GKent is in the running for a hospital job in Putrajaya worth RM300-350m which could potentially materialise before the year end.

Risks

• Risk associated with the MRT2 track works is minimal given that both CCCC and GKent have the relevant experience.

Forecasts

• We reckon that our current earnings forecast are conservative on 2 fronts. Firstly, YTD job wins of RM495m has already surpassed our full year target of RM350m. Securing the hospital job would boost this even further. Secondly, we have discounted the PDP fees for the LRT3 by 50% as we took an (overly) prudent stance. As such, there is certainly an upside to our earnings projection which we will revisit in due course.

Rating

• Maintain BUY, TP: RM3.23

• Having undertaken the LRT extension systems and appointed as PDP for the LRT3, we view GKent as a formidable engineering force that can no longer be ignored. This recent MRT2 contract further solidifies our view.

• It also boasts solid financials with strong 3-year earnings CAGR of 17%, above industry ROE of 15.4% and net cash position of RM0.74/share (36% of market cap).

Valuation

• Our TP of RM3.23 is based on a simple 2-stage SOP methodology comprising (i) 14x P/E multiple applied to mid- FY18 core earnings and (ii) its net cash position. There is upside to our TP once we revisit our earnings forecast.

Source: Hong Leong Investment Bank Research - 25 Aug 2016