GKent reported 1QFY20 core PATAMI of RM13.5m (-26% QoQ, -34% YoY) which we deem within our expectations as we expect stronger a 2H performance due to resumption of LRT3 project. GKent’s outstanding construction orderbook (excluding LRT3 PDP) currently stands at c.RM700m based on our estimates. This translates into a healthy 2.4x cover ratio of FY19 engineering revenue (excluding JV). Maintain forecast. Introduce FY21 earnings forecast of RM55.5m. Upgrade to BUY rating with higher SOP-driven TP of RM1.43 (from RM1.41) after update of model. We upgrade the stock as major uncertainty to the company has been removed and its cheap valuation attributed to its huge net cash position (40% of market cap).

Deemed within expectations. GKent reported 1QFY20 results with revenue of RM82.8m (-28% QoQ, -17% YoY) and core PATAMI of RM13.5m (-26% QoQ, -34% YoY). Core PATAMI accounted for 19% of our full year forecast (consensus: 19%). We deem the results within our expectations as we expect stronger 2H performance upon the expected resumption of LRT3 project to boost JV profits.

QoQ. Core PATAMI decreased by 26% due to lower contribution from both engineering and metering segments.

YoY. Core PATAMI decreased by 34% mainly due to losses incurred in MRCB-Gkent JV (against RM9.2m profit in 1Q19) as LRT3 project works have halted for redesigning.

Engineering. GKent’s outstanding construction orderbook (excluding LRT3 PDP) currently stands at c.RM700m based on our estimates. This translates into a healthy 2.4x cover ratio of FY19 engineering revenue (excluding JV). GKent is focusing on regional rail related opportunities and any participation is likely through joint ventures or strategic alliances with international partners. For the 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.

Metering. 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.

Forecast. Maintain as the results deemed inline. Introduce FY21 earnings forecast of RM55.5m

Upgrade to BUY, TP: RM1.43. Upgrade to BUY with higher SOP-driven TP of RM1.43 (from RM1.41) after update of model due to release of latest annual report and roll forward of valuation to mid-FY20. We opine that the key uncertainty for GKent has been removed following the renegotiation and restructure of LRT3 PDP contract. Current outstanding orderbook is healthy and provides 4-5 years earnings visibility to GKent. The potential revival of rail related jobs (ECRL recently and potentially HSR and MRT3) should serve to boost sentiment as well. Moreover, GKent’s balance sheet is very healthy with net cash of RM0.44 per share, amounting to 40% of current market capitalization.

Source: Hong Leong Investment Bank Research - 26 Jun 2019