Highlights

• Bags MRT2 contract… Late last month, GKent (via a JV with CCCC) managed to beat 6 other contenders for the MRT2 track works worth RM1bn (completion in May 2022). We reckon that execution should not be an issue as GKent successfully completed the Ampang LRT extension systems (which also encompassed track works) on time and within budget. Its JV partner, construction giant CCCC, has vast rail related experience.

• ...to further balloon orderbook. With its 49% stake in the JV, GKent’s s hare of the MRT2 track works amounts to RM494m, enhancing its orderbook by 10% to RM5.5bn. This translates to an explosive cover ratio of 13.5x on FY15 construction revenue, the highest in our sector coverage (average ex. GKent: 3.6x).

• Gunning for more. We understand that GKent has a Letter of Intent (LOI) for a hospital job in Putrajaya worth RM300-350m which could materialise to an award by year end. Aside that, GKent is also working to secure another hospital job in the Klang Valley, potentially worth RM200-250m.

• LRT3 launched. With the LRT3 (RM9bn) officially launched last month by the Prime Minister, we expect the MRCB-GKent JV to ink the PDP agreement with Prasarana very soon and major contract awards between 4Q16 and 3Q17.

• Metering potential. GKent recently tendered for the sole supply of water meters in Malacca, whereby its bid was one of the lowest. In Selangor, GKent is eyeing to participate for next year’s s upply tender. Selangor was previously inaccessible to GKent given the exclusive supply rights granted to Puncak Niaga which has now lapsed following the recent water asset restructuring. If successful , GKent could supply 250k units of water meters to both states annually (Selangor: 200k, Malacca: 50k) vs its capacity of 2.4m.

Risks

• Any possible delays in the LRT3 would be the key risk.

Forecasts

• Our earlier forecast may have been overly conservative as (i) the MRT2 contract (RM494m) has already surpassed our full year job wins target (RM350m) and (ii) we previously discounted the LRT3 PDP fees by 50%.

• We raise FY17 new job wins to RM840m from RM350m after imputing the MRT2 contract. With the LRT3 officially launched, we have decided to remove the 50% discount on its PDP fees. Overall, FY18-19 earnings are raised by 30% and 27% respectively.

Rating

• Maintain BUY, TP raised to RM4.01 (+48% upside)

• Having undertaken the LRT extension, PDP appointment for the LRT3 and recently secured MRT2 track works , we view GKent as a formidable engineering force that can no longer be ignored.

• It also boasts solid financials with superior 3-year earnings CAGR of 26%, above industry ROE of 15.4% and net cash position of RM0.74/share (27% of market cap). Strong 2QFY17 results, due for release on 26 Sept, could be an added short term catalyst.

Valuation

• Following our earnings upgrade and rolling over our valuation horizon from mid-FY18 to FY18, our SOP based TP is raised from RM3.23 to RM4.01.

Source: Hong Leong Investment Bank Research - 7 Sep 2016