Results

• GKent registered 3QFY18 results with revenue coming in at RM127.1m (-32% QoQ, +4% YoY) and core earnings (ex. forex) of RM31.3m (+33% QoQ, +39% YoY).

• Cumulative 9MFY18 revenue amounted to RM444.1m (+8% YoY) while core earnings totalled RM76.2m (+34% YoY).

Deviation

• 9M core earnings accounted for 75% of our full year forecast which is within expectations but were slightly behind consensus at 68%.

Dividends

• Interim DPS of 2 sen was declared (YTD: 5.5 sen).

Highlights

• Engineering margin expands. Despite flattish (+3%) engineering revenue for the 9M period, PBT (adjusted to exclude associates and JV) increased 17% YoY as margin expanded from 19% to 21.7%. We believe the margin expansion was likely due to the booking of variation order (VO) works for the LRT extension which should mostly be completed in FY18.

• LRT3 contracts roll out. We understand that as of end 3QFY18, GKent has yet to book in any significant PDP fees for the LRT3. While this is the case, share of JV profits (from PDP role) increased 81% YoY to RM8.9m which was mostly due to reimbursables for initial works undertaken. Thus far, 6 viaduct and 1 depot packages for the LRT3 has been awarded totalling RM7.1bn. Recognition of the PDP fees should gain traction in FY19.

• Metering a star performer. For the 9M period, metering revenue rose 27% YoY and PBT by a larger quantum of 60%. PBT margin expanded from 20.6% to 25.8% due to higher margin garnered from orders in Selangor, Singapore and Nepal.

Risks

• Delays in the rollout LRT3 would be the key risk.

Forecasts

• Unchanged as the results were inline.

Rating

Maintain BUY, TP raised to RM3.90

• 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 (20% of market cap).

Valuation

• While there are no changes to our earnings forecast, we raise our TP slightly from RM3.75 to RM3.90 after rolling over our valuation horizon from mid-FY19 to end-FY19. Our TP implies FY18-19 ex. cash P/E of 17.9x and 16x respectively.

Source: Hong Leong Investment Bank Research - 6 Dec 2017