Gkent’s 9MFY20 earnings of RM35m (-44% YoY) were below our and consensus expectations. YTD core PATAMI decreased 43.9% YoY as a result of lower contribution from engineering and metering segments compounded by lower contribution from LRT3 JV. We estimate the company’s construction orderbook (ex-LRT3) amounts to c.RM300m (cover ratio of 1.1x). Work progress for LRT3 remains slow but management expects things to gradually ramp up and back to full swing in CY20. Cut FY20/21/22 earnings by 7.4%/1.4%/1.5%. Maintain HOLD rating with lower SOP-driven TP of RM0.99 (previously RM1.04) following the earnings cut. Our TP implies P/E of 9.6x for FY20 and 9.4x for FY21 and FY22.

Below expectations. Gkent reported 3QFY20 results with revenue of RM72.9m (- 25.4% QoQ, -29.6% YoY) and core earnings of RM10.3m (-7.2% QoQ, -43.4% YoY). This brings 9MFY20 core earnings to RM34.8m (no EIs for the period), decreasing by 43.9% YoY. The core earnings accounted for 61% of our full year forecast (consensus: 60%), which is below expectations. Second interim dividend of 1.0 cent was declared (going ex on 8 Jan-20) bringing FY20 dividends declared to 2.5 cents (9MFY19: 3.5 cents).

Deviations. The results shortfall was primarily due to lower than expected revenue contribution from engineering (from thinning orderbook) and metering segments.

QoQ. Core PATAMI decreased by 7.2% due to lower contribution from engineering (ex LRT3 JV) segment which saw revenue and PBT contracting by 42.1% and 47.9% respectively. This was partially offset by stronger contribution from metering segment as PBT increased by 38.1%.

YoY. Core PATAMI declined by 43.4% dragged by lower contribution from both engineering and metering segments which saw respective PBT declined by 64.3% and 41.4% respectively.

YTD. Core PATAMI decreased by 43.9% as a result of lower contribution from engineering and metering segments compounded by lower contribution from LRT3 JV which recorded a marginal loss (9MFY19: RM18.4m). The lower contribution from LRT3 JV was mainly due to delays in work progress for the projects arising from finalisation of designs and specifications with respective sub-contractors. Management is expecting the project to ramp up and revert to full swing in CY20.

Outlook. We estimate the company’s construction orderbook (ex-LRT3) amounts to c.RM300m which translates into cover ratio of 1.1x of FY19 construction revenue. For its construction segment, management is looking to secure regional rail related opportunities with a potential tenderbook of RM1bn (Singapore LTA Trackworks and Bangkok Orange Line 2nd Phase Trackworks). Recently, Gkent was contracted by Selangor water authority to supply, deliver and install 5,540 smart water meters. Moving forward, Gkent is targeting to grow profit contribution from its metering division to 50% (from 20%) by 2022 and to 75% in the longer term.

Forecast. Cut FY20/21/22 earnings by 7.4%/1.4%/1.5% after factoring lower progress billings and water meter sales.

Maintain HOLD, TP: RM0.99. Maintain HOLD rating with lower SOP-driven TP of RM0.99 (previously RM1.04) following the earnings cut. We opine that the key overhang for GKent remains its slow construction orderbook replenishment prospects with downside cushioned by a healthy balance sheet (net cash amounts to 34% of market cap) as well as projected FY20-21 dividend yields of 4.3% and 4.4%. Our TP implies P/E of 9.6x for FY20 and 9.4x for FY21 and FY22.

Source: Hong Leong Investment Bank Research - 19 Dec 2019