Highlights

• Hosts briefing. We attended GKent’s 4QFY17 results briefing yesterday which was represented by its Executive Director, Mr Bernie Ooi and Finance Manager, Mr Ong Kum Weng. To recap, FY17 core earnings (ex. forex) of RM94m (+133% YoY) was above expectations.
• Continued works from LRT ext. Engineering PBT margin (ex. associates and JVs) expanded significantly YoY from 13.5% to 22.9%. This was due to the continued recognition of variation orders (VOs) for the Ampang LRT ext. Although the line is fully operational, several system upgrading works are still being undertaken. Management guides that there is c.RM400m worth of such works outstanding which should be largely recognised in FY18.
• Eyeing to grow orderbook further. With RM1.1bn worth of new job secured last year, GKent’s orderbook now stands at RM6.2bn, translating to a superior cover of 10.4x on FY17 construction revenue. GKent is keen to participate in the system works for rail projects such as the East Coast Rail Link, Southern Double Track and High Speed Rail. Apart from that, it has also tendered for a water treatment plant job (RM200m) where it is going against 2 other contenders.
• LRT3 awaits take off. Awards for the LRT3 are expected to happen from 2Q17 onwards where there will be a total of 18 main infra packages and 8 systems packages. There could be upside the LRT3’s value of RM9bn as (i) accelerated works may be required should the completion deadline not be extended beyond Aug 2020 and (ii) several design changes have been requested by Prasarana.
• Expansion for metering. The metering segment saw production increase to 1.8m meters in FY17 from 1.4m. Significant contracts achieved during the year include (i) 3rd consecutive tender win from Singapore’s Public Utilities Board for 323k meters, (ii) clinched Selangor water meter contract for 530k meters (largest contract in Malaysia) and (iii) penetrated into Nepal with 70k meter order.

Risks

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

Forecasts

• No further changes to estimates. We have already upgraded FY18-19 earnings forecast by 18% and 27% following the results release. Rating Maintain BUY, TP: RM4.73
• GKent is a key rail play with exposure to the LRT extension, LRT3 and MRT2. It also boasts solid financials above industry ROE of 26% and net cash of RM0.99/share (28% of market cap).

Valuation

• Our SOP based TP of RM4.73 implies an ex. cash P/E of 15x and 13.3x respectively for FY18-19.

Source: Hong Leong Investment Bank Research - 22 Mar 2017