Although LRT3 project is expected to commence in 2HCY19, we understand that meaningful profit contribution to MRCB-GKent JV will only kick in from FY21 onwards. GKent is currently bidding for a few water infrastructure projects in Kedah and Johor with contract size of RM100-200m for each contract and 2 hospital projects with unspecified contract value. Maintain forecast and HOLD but with higher TP of RM1.10.

GKent Held An Investor’s Briefing Yesterday With the Following Key Takeaways:

4Q19 results. The exceptionally high gross profit margin in 4Q19 results (c.61%) was mainly due to recognition of VOs from LRT2 extension and management guides that this will not continue going forward. The amount of other expenses increased significantly (QoQ: +238%, YoY: +165%) mainly due to tendering costs incurred for the HSR and Singapore MRT projects.

LRT3. JV contributions slipped into losses of RM6m due to minimal revenue recognition for the LRT3 (MRCB-GKent JV) and reversal of profits due to downwards adjustment in contract value of the job. Although the project is expected to commence in 2HCY19, we understand that meaningful profit contribution will only kick in from FY21 onwards. MRCB-GKent JV is actively engaging with the work package contractors and encouraging the bigger construction players to negotiate with smaller subcontractors to help out on the latter’s work packages in order to mitigate construction risk and shorten completion time of the project.

Potential construction jobs. Focus on potential jobs would be on regional rail related opportunities and GKent is studying on possibilities to participate in Singapore’s rail related job bidding. We opine that GKent would face an uphill battle as construction bidding is very competitive in Singapore. For domestic front, a near term opportunity for GKent would be Klang Valley Double Track 2 (RM5bn) and we understand that the company is looking for a JV partner to participate in the tender. GKent is also bidding for a few water infrastructure projects in Kedah and Johor with contract size of RM100-200m for each contract and 2 hospital projects with unspecified contract value.

Smart meters. GKent’s automated meter reading solution (a.k.a. smart meters) is undergoing pilot testing in several states with commercialisation set for CY19. We opine that the sales of smart meters will benefit from the government’s effort to curb non-revenue water (NRW) given their ability to provide customers with real-time access to water consumption data for billing and monitoring consumption patterns as well as detecting leakages in the water supply system.

Outlook. GKent is targeting to grow profit contribution from metering division to 50% (from 20%) in the short term and to 75% in the longer term given the slowdown in domestic 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.

Forecast. Maintained as the briefing yielded no major surprises.

Maintain HOLD, TP: RM1.10. Despite unchanged earnings, we raise our SOP based TP to RM1.10 (from RM0.97) after updating its latest net cash position. 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) net cash per share. While valuations are undemanding, sustainability of its current earnings level is an issue post completion of LRT3 given the scale back in rail jobs.

Source: Hong Leong Investment Bank Research - 27 Mar 2019