Highlights

• Hosts briefing. We attended GKent’s 2QFY18 results briefing last Friday which was represented by Mr Bernie Ooi (Executive Director), Mr Phoon Hee Yau (GM Strategy) and Mr Ong Kum Weng (Finance Manager). To recap, core earnings (ex. forex) for 1HFY18 came in at RM45m which was within expectations at 44% of our full year forecast. We expect a stronger 2H which is traditionally stronger and management concurs with this view.
• LRT3 awards have commenced. Management shared that several awards for the LRT3 have taken place since mid- 2017. These include (i) 9 out of 18 infra packages and (ii) 6 out of 8 systems packages. To speed up construction time, project owner Prasarana has requested for an elevated option to potentially replace the tunnelling segment (c.2km out of the 37km line). Overall, management is hopeful to get all of the contracts dished out by 1Q18. Thus far, GKent has yet to book in any PDP fees (6%) for the LRT3. With several contract awards dished out since mid-2017, management guides there could be some PDP fee recognition in 2HFY18.
• Gunning for more rail jobs. Management indicated that it is has submitted proposals to main contractor CCCC to undertake a portion of the ECRL (RM55bn) systems works. For the HSR (RM60bn), GKent (together with a foreign JV partner) is currently eyeing on the Assets-Co role which will be responsible for the design, build, finance operate and maintain the rolling stock and rail assets. Should this not materialise, GKent will then try to participate at the engineering level focusing on the systems works.
• Cash pile plans. GKent’s net cash position now stands at RM395m. Management plans to utilise the cash for the following (i) working capital for future rail jobs, (ii) higher dividends and (iii) M&A for the metering division which targets companies with presence in Europe and US to expand its reach which is now mostly centred in Asia.

Risks

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

Forecasts

• Unchanged as the briefing yielded no surprises.

Rating

Maintain BUY, TP: RM3.75

• 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 RM0.70/share (23% of market cap). GKent remains our top pick in the construction sector.

Valuation

• Our SOP based TP of RM3.75 implies an ex. cash P/E of 17x and 15.1x respectively for FY18-19.

Source: Hong Leong Investment Bank Research - 02 Oct 2017