Highlights

• Hosts briefing. We attended GKent’s 4QFY18 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 FY18 were above expectations at RM138m (+47% YoY), forming 136% of our full year forecast.

• High margin from LRT ext. 4QFY18 engineering PBT margin (ex associates and JV profits) was exceptionally high at 47.1% which management explained was due to significant recognition of variation order (VO) works on the LRT ext. There is a remaining RM193m worth of works comprising the Bukit Jalil siding, depot equipment, roofing and platform. As such, we opine that the strong engineering margins will persist into FY19.

• Most LRT3 packages awarded. Apart from the bus depot, all major LRT3 packages have been awarded and work progress is estimated at 3%. Contribution from the LRT3 (share of JV profits) was RM17m for FY18 and this is expected to accelerate strongly for FY19.

• Finalist for MRT3. The Gamuda-MMC-GKent JV and CCCC are the finalists for the MRT3 (RM45bn). Although management did not reveal its stake in the JV, it has been agreed that GKent will undertake the system works potentially amounting to RM6-8bn. Securing this would double its orderbook which currently stands at RM5.5bn. Results for the MRT3 turnkey role is expected to be revealed by mid-2018. We remain optimistic on the JV winning the turnkey role given its (i) pure local set up and (ii) lower rate of financing offered.

• Running the HSR race. Last month, a consortium was formed between GKent and 4 European names (Siemens, Alstom, Italian State Railways and PORR) to bid for the HSR AssetsCo role. Management expects bidding competition from the Chinese, Japanese and Korean consortiums. The tender will close in end June.

• Other potential jobs. These include (i) Singapore MRT track works (SGD150m); (ii) a hospital (RM500m); (iii) ECRL systems (RM1bn); and (iv) water related jobs.

Risks

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

Forecasts

• Unchanged as the briefing yielded no surprises.

Rating

Maintain BUY, TP: 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

• Our SOP based TP of RM5.66 implies an ex. cash P/E of 19x and 17x respectively for FY19-20.

Source: Hong Leong Investment Bank Research - 21 Mar 2018