Despite reporting a slower 1QFY20 results, our analyst had upgraded the stock to BUY with RM1.43 TP (+30% upside), banking on the stronger 2H performance due to resumption of LRT3 project, cheap valuations (8.9x FY20 P/E/-23% below 10Y average; 1.23x P/B/-35% below 10Y average), sound balance with RM0.44 net cash per share or 40% of market cap, attractive FY20 dividend yield at 5.9%, and solid outstanding construction orderbook about RM6bn (including ~RM5bn LRT3 PDP) to provide 4-5 years earnings visibility. Meanwhile, positive conclusion of Malaysia’s water restructuring saga should also bode well for GKENT, a vertically integrated service provider in M&E, civil engineering and water metering & valve manufacturing. Technically, GKENT is poised for a downtrend line breakout to spur prices towards RM1.20-1.30 zones.

Future 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 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.

Pending a downtrend line breakout. After rallying 82.8% from 52-week low of RM0.755 (18 Dec) to RM1.38 (YTD high on 22 Apr), GKENT’s share price tumbled 20.3% on profit taking to end at RM1.10 yesterday. As GKENT is forming short term higher high and higher low formation, we believe GKENT is at the tail end of its 1M sideways consolidation and ripe for a downtrend line breakout soon. A decisive breakout above RM1.15 (downtrend line) will spur prices higher towards RM1.20 (50% FR) before reaching our long term target at RM1.30 levels (76.4% FR). On the flip side, failure to hold at RM1.06 (lower Bollinger band) may indicate weakness in the share price towards 1M low at RM1.03 (28 May). Cut-loss at RM1.02.

Source: Hong Leong Investment Bank Research - 27 Jun 2019