Highlights

• Hosts briefing. We attended GKent’s 3QFY18 results yesterday 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 for 9MFY18 were within expectations at RM76m (+34% YoY), forming 75% of our full year forecast.

• Higher margin explained. 9M engineering PBT margin (ex associates and JV profits) expanded YoY from 19% to 21.7%. Management explained that this was due to (i) more LRT ext variation orders booked, with RM259m balance to last into FY19 and (ii) account finalisation of a water pumping station job with higher than expected margin.

• LRT3 underway. 3Q witnessed the recognition of some LRT3 PDP fees contributing to the 81% YoY rise in JV profits to RM9m for the 9M period. 15 out of 18 infra packages have been awarded while for the systems, 7 out of 8 have been dished out. Progress rate stood at 1% as of end 3QFY18 and this is scheduled for completion by Aug 2020 for Phase 1 and Feb 2021 for Phase 2.

• Setting its sight on the HSR. GKent (via a JV with Siemens) is preparing its bid for the HSR AssetsCo role in which the Request for Proposal (RFP) is expected to be called sometime this month. The AssetsCo role encompasses the systems and rolling stock (RM20-25bn) along with funding. In return, AssetsCo will be granted a 30 year concession to earn availability payments and train lease fee. Although not finalised, Siemens will take the lead in the JV with >60% stake.

• Getting smart on metering. Management indicated that it will be commercialising its Automated Meter Reading (AMR) product which enables remote reading of water meters. The Selangor state is expected to call tenders for AMR meters in the next 2 months to run a pilot project. States such as Johor and Penang are also looking to replace traditional meters with AMR ones. GKent is the leader for water meters in Malaysia with >50% market share. Malaysia currently runs solely on traditional meters and the switch to AMS would open up a whole new market for GKent.

Risks

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

Forecasts

• Unchanged as the briefing yielded no surprises.

Rating

Maintain BUY, TP: RM3.90

• 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

• Our SOP based TP of RM3.90 implies an ex. cash P/E of 17.9x and 16x respectively for FY18-19.

Source: Hong Leong Investment Bank Research - 7 Dec 2017