Results

• GKent posted 4QFY18 results with revenue coming in at RM173.1m (+36% QoQ, -9% YoY) and core earnings (ex. forex) of RM61.9m (+98% QoQ, +68% YoY).

• Full year FY18 revenue amounted to RM617m (+3% YoY) while core earnings totalled RM138.1m (+47% YoY).

Deviation

• FY18 core earnings accounted for 136% of our full year forecast (consensus: 118%) which is above expectation.

• The stronger-than-expected results stemmed from (i) higher metering revenue; (ii) better engineering margin; and (iii) strong progress on the LRT3 (JV profits).

Dividends

• A 3 rd interim DPS of 5 sen was declared, bringing the full year FY18 sum to 9.5 sen (vs our forecast of 9 sen). In comparison, total DPS for FY17 was 6.7 sen.

Highlights

• Engineering margin expanded strongly. In spite of flattish engineering revenue (-1% YoY) for FY18, PBT increased 26%. Margin expanded YoY from 22.9% to 29.3% which we believe was due to the recognition of variation order (VO) works for the LRT extension. We gather that there is roughly RM100m worth of remaining works on the LRT extension which will be completed in FY19.

• LRT3 gained traction. Contribution from the LRT3 PDP (JV profits) totalled RM16.8m in FY18, increasing 184% YoY. With the recent underground package (RM1.1bn) of the LRT3 awarded to IJM (BUY, TP: RM3.49), most of the major packages have already been dished out. As such, we expect recognition of the PDP fees (6%) to gain further momentum in FY19. We understand that most of the awarded work packages are to be implemented on a fast track basis.

• Metering surged. FY18 metering revenue and PBT rose 20% and 32% YoY respectively. PBT margin expanded from 21.5% to 23.8% due to higher margin garnered from orders in Selangor, Singapore and Nepal.

Risks

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

Forecasts

• We raise FY19-20 earnings by 26% and 23% as we impute (i) higher engineering margins as the LRT ext works will continue into FY19; (ii) stronger metering growth; and (iii) higher execution rate on the LRT3.

Rating

Maintain BUY, TP raised to RM5.66

• GKent is a key proxy to the booming rail project rollouts in Malaysia. We believe that it is in a polar position to participate in jobs such as the MRT3 and HSR. It also boasts a net cash position of RM0.82/share (19% of market capitalisation).

Valuation

• With the earnings upgrade, our SOP based TP is raised from RM4.58 to RM5.66. This implies FY19-20 ex. cash P/E of 19x and 17x, respectively.

Source: Hong Leong Investment Bank Research - 20 Mar 2018