GKent’s FY21 earnings of RM37m (-10%) were above our and consensus expectations. Results beat was mainly due to faster than expected ramp up of LRT3 contribution. Core PATAMI decline dragged by weak construction contribution partially offset by its resilient metering division. Estimated construction orderbook (ex-LRT3) amounts to c.RM160m (cover ratio: 1.1x). Raise FY21-23 earnings by 7-10%. Upgrade to HOLD with higher TP of RM0.74 after pegging FY22 EPS to 7.5x PE multiple.

Above expectations. GKent reported 4QFY21 results with revenue of RM87.8m (11% QoQ, 7% YoY) and core earnings of RM14.3m (34% QoQ, 111% YoY). This brings FY21 core earnings to RM37.4m, decreasing by -10% YoY. The core earnings accounted for 116% of our full year forecast (consensus: 110%), which is above both our and consensus expectations.

Deviation. Results were driven by faster than expected ramp up of LRT3 contribution.

Dividends. DPS of 1.5 sen going ex on 6 April 2021 was declared (FY21: 2.5 sen; FY20: 2.5 sen).

QoQ. Core earnings increased by 34% to RM14.3m in 4QFY21 aided by ramp up from its LRT3 JV contribution with share of JV coming in at RM7.9m (3QFY21: RM0.2m). This was due to the finalisation of supplemental agreements with a majority of sub-contractors thereby allowing earlier earnings recognition. GKent’s PBT excluding JV and associates contribution fell by -43% QoQ dragged by its hospital projects and metering segment

YoY. GKent’s earnings doubled on the back of stronger LRT3JV contribution increasing to RM7.9m from RM0.3m in 4QFY20. This helped offset a -9% decline in PBT excluding JV and associates.

YTD. Core earnings declined by -10% falling in tandem with -18% in revenue given the disruptions from various forms of MCO. Offsetting a steep fall in contribution from the hospital projects were strong metering performance and kicking in of LRT3 project.

Construction. We estimate GKent’s outstanding orderbook (ex-LRT3) amounts to c.RM160m which translates into cover ratio of 1.1x, based on FY21 construction revenue. Revenue and PBT (excluding JV & associates) declined by -34% and -40% respectively owing to lockdowns and SOP measures. Both its hospital projects are expected to end in CY21. LRT3 JV contribution finally picked up having completed most of its supplemental contracts.

Manufacturing. Revenue and PBT increased by 10% and 54% respectively. Growth came largely on the back of resilient demand from overseas and local markets as well as better margins owing to sales mix, lower material and overhead expenses.

Forecast. Increase FY22-23 earnings by 7.3% and 10.6% after adjusting for stronger JV contribution and recalibrating margin assumptions.

Upgrade to HOLD, TP: RM0.74. With results surprising on the upside, we upgrade our call to a HOLD with higher TP of RM0.74 post earnings adjustment. We grow less concern on GKent’s earnings trajectory post-running down its existing orderbook given the strong performance from its metering segment as well as kick start of LRT3 contribution. TP is derived from pegging FY22 earnings to 7.5x P/E multiple.

Source: Hong Leong Investment Bank Research - 23 Mar 2021