Results

• GKent reported 4QFY17 results with revenue of RM189m (+55% QoQ, -29% YoY) and core earnings (ex. forex) of RM37m (+63% QoQ, +44% YoY).

• Full year FY17 core earnings (ex. forex) amounted to RM94m, surging +133% YoY. The strong earnings growth YoY was attributed to (i) revenue growth of +11%, (ii) margin expansion with PBT level almost doubling from 11.3% to 21.2% and (iii) lower effective tax rate from 35.3% to 27.5%.

Deviation

• While our revenue projection was inline (99% of full year forecast), core earnings exceeded our estimate by 32%. This was largely due to stronger than expected margins from the engineering segment, possibility attributed to the recognition of variation orders (VOs) for the LRT extension.

Dividends

• Final dividend of 5 sen was declared. Coupled with the 2 interim dividends earlier declared, this brings FY17 dividend to 10 sen (FY16: 7 sen).

Highlights

• Engineering the star performer. While FY17 engineering revenue grew +9% YoY, PBT (ex associates and JVs) increased by a much larger magnitude of +85%. Engineering PBT margin expanded from 13.5% to 22.9% as more LRT ext VOs continued to be booked. We gather that there is c.RM400m worth of such works outstanding.

• Sizable orderbook in its bag. With FY17 job wins at RM1.1bn, GKent’s orderbook stands at RM6.2bn. This translates to a superior cover ratio of 10.4x on FY17 construction revenue, the highest in our sector coverage.

• Metering still up despite forex impact. While the metering division saw FY17 revenue grow by +21% YoY, PBT increased by a smaller magnitude of +16% as margins contracted slightly from 22.4% to 21.5%. This was largely due to forex loss in FY17 as opposed to gains in FY16.

• Proposes share split… involving the subdivision of 2 shares into 3 split shares, targeted for completion in 3Q17.

Risks

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

Forecasts

• In view of the strong results, we raise FY18-19 earnings by 18% and 27% respectively. This earnings upgrade largely stems from continued recognition of the high margin LRT ext VO works.

Rating

Maintain BUY, TP raised to RM4.73

• GKent is a key rail play with exposure to the LRT extension, LRT3 and MRT2. It also boasts solid financials with above industry ROE of 26% and net cash position of RM0.99/share (31% of market cap).

Valuation

• Apart from the earnings upgrade, we also impute the higher net cash balance into our SOP based TP, increasing it from RM3.77 to RM4.73. This implies an ex. cash P/E of 15x and 13.3x for FY18-19

Source: Hong Leong Investment Bank Research - 21 Mar 2017