News

• Wins Hong Kong meter tender. GKent announced that it has won the tender to supply 650k water meters to Hong Kong’s Water Supplies Department (WSD). The supply contract is valued at US$6.9m (RM28.7m) which will be delivered in 24 shipments over a 2 year period.

650 Comments

• Returning to Hong Kong. This is the second time that GKent has managed to win the supply contract from Hong Kong’s WSD. It previously won its first supply contract for 600k meters back in 2015. Going by industry standards, this recent single order of 650k meters is indeed an enormous order.
• Strong recognition. Apart from Hong Kong, GKent was also successful in winning its third consecutive supply contract for 324k meters from Singapore’s Public Utilities Board (PUB) last year. We view GKent’s ability to secure repeated large orders from these developed nations as testament to the recognition of its product quality.
• Additional earnings booster. Over the past 3 years, metering contributed 20-28% to revenue. While engineering has now taken the lion’s share of GKent’s revenue (72-80% for FY15-17), we feel there could be a potential additional upside coming from its metering division as driven by these sizable supply contracts.

Risks

• Risk associated with this contract is an appreciating ringgit (i.e. weaker USD).

Forecasts

• Our forecast only factors in 4% revenue CAGR for its metering division at gross margin of 25-26% for FY18-20. We understand that this growth could potentially be in the low-to-mid-teens for FY18 and FY19 as production ramps up to cater for these supply contracts.
• Nonetheless, we are taking the more conservative stance and keeping our forecast unchanged for now. 2QFY18 results are scheduled to be released on 28 Sept followed by a briefing the next day.

Rating

Maintain BUY, TP: RM3.73

• GKent is a key rail play with exposure to the LRT extension, LRT3 and MRT2. We believe it is in a prime position to participate in upcoming mega rail projects such as the ECRL and HSR. It also boasts solid financials with above industry ROE of 24%, 3 year projected earnings CAGR of 12% and net cash position of RM0.68/share (25% of market cap). Strong contribution from metering as in added catalyst. GKent remains our top pick in the construction sector.

Valuation

• Our SOP based TP of RM3.73 implies FY18-19 ex-cash P/E of 17x and 15.1x respectively.

Source: Hong Leong Investment Bank Research - 12 Sep 2017