Gkent’s 1HFY19 earnings of RM44m (-2% YoY) were within our expectations but below consensus. YTD core PATAMI decreased as lower contribution from metering segment was partially offset by higher contribution from LRT3 PDP JV. The lower contribution from metering was mainly due to delays in the Vietnam water meter tender which was originally expected in 1Q19. We understand that the new LRT3 model will be structured as design & build contract with MRCB-Gkent JV remaining as the single point of responsibility to the government at a fixed lump sum contract value (estimated at RM9-16bn). We opine that the major difference between old PDP and new fixed priced model is the contract value will be fixed in the new model to prevent any incentive for the project manager (which is the PDP in this case) to inflate the project costs. Forecast unchanged. Maintain HOLD with unchanged SOP-driven TP of RM1.27.

Within HLIB estimates but below consensus. Gkent reported 2QFY19 results with revenue of RM112.9m (+13% QoQ, -40% YoY) and core earnings of RM23.5m (+16% QoQ, flat YoY). This brings 1HFY19 core earnings to RM43.9m, decreasing by 2% YoY. The core earnings accounted for 48% of our full year forecast (consensus: 33%), in line with HLIB but below consensus estimates. 2 sen interim dividend was declared.

QoQ. Core PATAMI increased by 16% due to higher contribution from both engineering (ex. LRT3 PDP JV) and metering segment, partially offset by lower contribution from LRT3 PDP JV due to scaling down and extension of construction timeline for the job.

YoY. Core PATAMI remained flat as higher contribution from engineering segment was offset by lower contribution from water segment.

YTD. Core PATAMI decreased by 2% as lower contribution from metering segment was partially offset by higher contribution from LRT3 PDP JV. The lower contribution from metering was mainly due to delays in the Vietnam water meter tender which was originally expected in 1Q19. We understand the issue has been resolved and more tender will be called from 3Q onwards.

LRT3. We understand that the new LRT3 model will be structured as design & build contract with MRCB-Gkent JV remaining as the single point of responsibility to the government at a fixed lump sum contract value. The contract value is estimated to be at an amount between RM9bn to RM16bn. We opine that the major difference between old PDP and new fixed priced model is the contract value will be fixed in the new model to prevent any incentive for the project manager (which is the PDP in this case) to inflate the project costs.

Forecast. Unchanged as Results Were Inline.

Maintain HOLD, TP: RM1.27. Maintain HOLD rating with unchanged TP of RM1.27. 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 FY24.

Source: Hong Leong Investment Bank Research - 27 Sept 2018