LRT3’s main works like stations and viaduct line have halted as the project is in redesign stage. We understand that the project will only be back to full swing in CY20. Recently termination of some LRT3 work packages is due to disagreement between GKent-MRCB JV and work package contractors on the revised terms of work packages. Maintain forecast and BUY rating with unchanged SOP-driven TP of RM1.43.

We Met Up With the Management of GKent Recently With the Following Key Takeaways:

LRT3. Construction cost of LRT3 has been revised downwards to RM16.63bn (from RM22.5bn) with a fixed price contract model. Main works like stations and viaduct line is halted as the project is now in redesign stage. Latest guidance is that the project will only resume in 4QCY19 (as opposed to previous guidance of mid-2019) and back to full swing in CY20. Recently termination of some LRT3 work packages was due to disagreement between GKent-MRCB JV and work package contractors on the revised terms. These terminated work packages would be retendered before end of this year.

Potential construction jobs. Focus on potential jobs would be on regional rail related opportunities and the pipeline includes track works for Singapore LTA and Bangkok Orange Line 2nd Phase (RM1bn). Other job focus for GKent would be water infrastructure jobs (RM1.5bn) and the pipeline includes Papua New Guinea (PNG) O&M contract extension, new water treatment plants in PNG and Malaysia. The company’s outstanding orderbook (ex-LRT3) stands at c.RM400m which translates into cover ratio of 1.43x of FY19 construction revenue.

Honeywell arrangement. GKent recently entered into a long-term license agreement with Honeywell that enables transfer of technology and associated machinery tools to the former to manufacture high-precision water meter measuring components for the V100 and V110 C-Class volumetric water meters. This would allow GKent to have better control of component supply to meet increasing demand and reduce production costs. The agreement also allows GKent to sell the products to 15 new territories in the Asia region.

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 understand that the company is expected to sell 9k units of smart meter in FY20 and 80k units in FY21. Although pricing of smart meters is significantly higher than that of conventional meters (4x the price), the contribution would not be significant in the near term as the unit size is still relatively small (vs 2.4m unit sales from current product range).

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.

Forecast. Maintained as the meeting yielded no major surprises.

Maintain BUY, TP: RM1.43. Maintain BUY rating with unchanged SOP-driven TP of RM1.43. We opine that the key uncertainty for GKent has been removed following the renegotiation and restructure of LRT3 PDP contract. 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 - 13 Aug 2019