GKent’s 1HFY20 earnings of RM25m (-44% YoY) were below both ours and consensus estimates mainly due to lower than expected contribution from LRT3 PDP JV as the project will only resume in 4QCY19 (as opposed to previous guidance of mid-2019) and back to full swing in CY20. YTD core PATAMI decreased due to lower contribution from all segments. 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. Cut FY20-21 earnings by 17.6% and 6.6% while increase FY22 earnings by 7.4% after we adjusted LRT3 contract progress assumptions. Maintain BUY with lower SOP-driven TP of RM1.41 (from RM1.43) after earnings forecast adjustment.

Below expectations. GKent reported 2QFY20 results with revenue of RM97.7m (+18.1% QoQ, -13.5% YoY) and core earnings of RM11.1m (-18.2% QoQ, -53.1% YoY). This brings 1HFY20 core earnings to RM24.6m, decreasing by 44% YoY. The core earnings accounted for 35% of our full year forecast (consensus: 38%), below both ours and consensus estimates. 1.5 sen (1HFY19: 2.0 sen) interim dividend was declared, going ex on 9 Oct 2019.

Deviation. Results were below mainly due to lower than expected contribution from LRT3 PDP JV as the project will only resume in 4QCY19 (as opposed to previous guidance of mid-2019) and back to full swing in CY20.

QoQ. Core PATAMI decreased by 18% due to lower contribution from both engineering (ex LRT3 PDP JV) and metering segment.

YoY/ YTD. YoY and YTD core PATAMI decreased by 53% and 44% respectively due to lower contribution from all segment.

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. Cut FY20-21 earnings by 17.6% and 6.6% while increase FY22 earnings by 7.4% after we adjusted LRT3 contract progress assumptions.

Maintain BUY, TP: RM1.41. Maintain BUY rating with lower SOP-driven TP of RM1.41 (from RM1.43) after earnings estimate adjustment. 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 RM0.37 per share, amounting to 36% of current market capitalization.

Source: Hong Leong Investment Bank Research - 25 Sept 2019