Gkent’s FY19 earnings of RM80m (-42% YoY) were within both HLIB and consensus expectations. YTD core PATAMI decreased due to lower contribution from both metering segment and LRT3 PDP JV. The lower contribution from LRT3 PDP JV due to scaling down and extension of construction timeline for LRT3. LRT3 has been restructured to a fixed price contract with contract sum of RM11.9bn. Construction is anticipated to resume in the second half of 2019. Gkent is targeting to grow profit contribution from Its metering division to 50% (from 20%) in the short term and to 75% in the longer term given the slowdown in the domestic rail construction industry Maintained forecast. Maintain HOLD rating with unchanged TP of RM0.97.

Within expectations. GKent reported 4QFY19 results with revenue of RM114.5m (+10.6% QoQ, -33.8% YoY) and core earnings of RM18.2m (+0.7% QoQ, -70.5% YoY). This brings FY19 core earnings to RM80.3m, decreasing by 41.9% YoY. The core earnings accounted for 95% of our full year forecast (consensus: 99%), which is within expectations. 3.5 cents 3rd interim dividend was declared.

QoQ. Core PATAMI remained flattish due to lower contribution from metering segment and LRT3 PDP JV, partially offset by higher contribution from engineering segment.

YoY/ YTD. YoY and YTD core PATAMI decreased by 71% and 42% respectively due to lower contribution from both engineering (inclusive of LRT3 PDP JV) and metering segment.

LRT3. Construction costs of LRT3 have been revised downwards to RM16.63bn (from RM22.5bn) with a fixed price contract model. Main works like stations and viaduct line have halted as the project is now in redesign stage. We understand that the project will only be back to full swing in 2HCY19.

Outlook. GKent is targeting to grow profit contribution from Its metering division to 50% (from 20%) in the short term and to 75% in the longer term given the slowdown in the domestic rail construction industry. The company is looking for potential M&A opportunities and also may form strategic alliances to expand geographical markets and diversify products range. For the engineering segment, near term opportunities for Gkent would be water treatment plants jobs (RM100-200m) and the Klang Valley Double Track 2 (RM5bn) where we understand that the company is looking for a JV partner to participate in the tender.

Forecast. Maintained as the Results Were Inline.

Maintain HOLD, TP: RM0.97. Maintain HOLD rating with unchanged TP of RM0.97 Our SOP valuation for GKent is based on (i) NPV (WACC: 12%) for its engineering division with nil orderbook replenishment, (ii) 8x P/E for metering assuming no YoY growth and (iii) 20% discount to its net cash per share. Our valuation is based on a 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 - 26 Mar 2019