GKent's 1QFY19 core net profit of RM20m was deemed in line with both HLIB and consensus expectations as 2H is seasonally stronger. Core net profit declined 5% YoY mainly due to lower contribution from metering, partially offset by stronger share of JV profits attributable to LRT 3 PDP fees. The lower contribution from metering was mainly due to delays in Vietnam water meter tender which was originally expected in 1Q19. Prospect for GKent remains subdued post changes in federal government and scrapping of mega rail projects such as MRT3 and HSR in which the company is a strong contender. Nonetheless, earnings for the company over the next 3 years would be supported by the LRT3 PDP role. Raised FY20 earnings forecast by 2.1% post model adjustment. We introduce our FY21 earnings forecast of RM138.9m. We maintain our HOLD rating with higher TP of RM1.52 post earnings forecast adjustment.

Results deemed within estimates. 1QFY19 core net profit came in at RM20.3m, accounting for 14.9% of HLIB and 15.0% of consensus estimates. We deem the results inline as 2H is seasonally stronger. To illustrate, 1Q18 and 2H18 contributed 15.5% and 67.5% of FY18 core profit respectively.

QoQ: Core net profit declined 67.2% mainly due to decrease in Engineering segment revenue. This is not a concern given that 4Q is traditionally the strongest quarter for the year.

YoY: Core net profit decreased 4.9% mainly due to lower contribution from metering, partially offset by stronger share of JV profits attributable to LRT3 PDP fees. The lower contribution from metering was mainly due to delays in the Vietnam water meter tender which was originally expected in 1Q19.

Outlook. Prospects for GKent remains subdued post changes in the government after GE14 and scrapping of mega rail projects such as MRT3 and HSR in which the company is a strong contender. Moreover, the domestic construction industry landscape is expected to remain challenging and we do not expect a significant improvement in near term. Nonetheless, earnings for the company over the next 3 years would be supported by the LRT3 PDP role.

Forecast. Raised FY20 earnings forecast by 2.1% post model adjustment. We introduce our FY21 earnings forecast of RM138.9m.

Maintain HOLD, TP: RM1.52. Maintained HOLD with higher SOP-derived TP of RM1.52 (from RM1.50) post earnings forecast adjustment. Our SOP valuation for GKent is based on (i) NPV (WACC: 12%) for its engineering division with nil orderbook replenishment, (ii) 10x P/E for metering assuming no YoY growth and (iii) 20% discount to its net cash per share. Our valuation is based on bear case scenario for the company to reflect slowing mega rail job flows and earnings sustainability issue post completion of LRT3 which is expected in FY22.

Source: Hong Leong Investment Bank Research - 13 Jun 2018