News

• Wins hospital contract. GKent announced that it has been awarded a RM277m contract from the Ministry of Works for a 150-bed hospital in Tg Karang, Selangor on a design and build basis.

• Scope of works. The hospital is situated on a 17-acre site between Tg Karang and Kuala Selangor. It would comprise of a 150-bed medical and ward block, 30 units of housemen quarters, 24 units of quarters, 50-pax child nursery centre, an engineering block, cafeteria, visitor gallery and 2 fully equipped operating theatres. The contract will commence in Nov 2016 over a period of 4 years.

Comments

• Another hospital in the bag. Whilst management previously guided that it had bid for 2 hospital jobs, we did not expect this particular contract to materialise so soon. In terms of hospital track record, GKent has completed Phase 1 (RM98m) of the Kuala Lipis Hospital and is currently executing Phase 2 (RM57m).

• Job wins adding on strongly. With this hospital contract in the bag, GKent’s YTD job wins amounts to RM771m. We estimate its orderbook to now stand at RM5.7bn. This translates to a superior cover ratio of 13.9x on FY16 construction revenue, the highest within out sector coverage.

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

Risks

• We reckon that risk associated with this hospital job is minimal as GKent has undertaken such works before.

Forecasts

• As YTD job wins of RM771m is within our FY17 target of RM884, we maintain our forecasts. However, should the Putrajaya hospital job materialise, this could potentially surpass our FY17 orderbook replenishment assumption, giving further upside to our earnings estimate.

Rating

Maintain BUY, TP: RM3.25

• GKent is a key rail play with exposure to the LRT extension, LRT3 and MRT2. It also boasts solid financials with 3-year earnings CAGR of 26%, above industry ROE of 15.4% and net cash position of RM0.64/share (24% of market cap).

Valuation

• Our TP of RM3.25 is based on a simple 2-stage SOP methodology comprising (i) 14x P/E multiple applied to FY18 core earnings and (ii) its net cash position. There is potential upside to our TP once we revisit our earnings forecast.

Source: Hong Leong Investment Bank Research - 2 Nov 2016