GKent’s near term prospects should be hampered by the total lockdown. Its resilient metering segment could see slight impact from workforce constraints. We are not too sanguine on construction prospects due to stiffer competition as anaemic job flows has resulted in job hungry contractors. Not to mention volatile increases in materials cost has made tender costing trickier. As for gloves, it remains to be seen if capacity can ramp up quickly (given lockdown woes) to leverage on current favourable industry dynamics. The glove JV is still pending regulatory approvals. Cut FY22-23 earnings by 1-8%. Maintain HOLD with lower TP of RM0.78 after pegging FY22 EPS to 8x PE multiple.

We Held a Meeting With GKent With the Following Key Takeaways:

Construction. GKent sees better job prospects for the division vs 2019/20 (government more open to proposals this time round). Nonetheless, despite the aforementioned, rollout has been shackled by pandemic resurgence in 2021 and should continue to further slow job flows in the near term. On tenders, GKent is participating in various peninsular water-related and hospital jobs ranging from RM150-400m as well as Sarawak WTPs worth a combined RM1bn. Perhaps more notably, GKent recently pre-qualified for package 3, Rasau Water Scheme comprising design & build of boosters and reservoir in Kajang (est. RM500m). We are not too sanguine on GKent’s prospects due to stiffer competition as anaemic job flows in the past has resulted in job hungry contractors. Not to mention volatile increases in materials cost has made tender costing trickier.

Lockdowns. Under lockdown SOPs, GKent is permitted to work having achieved >80% completion for its hospital projects and LRT3 is considered a priority infrastructure project. However, productivity should fall further from SOPs and labour shortages. Complicating things further, steel and cement industries will be operating on “warm idle” during this period (nil production; 10% workforce only). Should the current scenario be prolonged beyond 2 weeks, we foresee supply chain issues for construction. As for its metering segment, operations will be capped at 60% workforce.

RTS & MRT3. GKent has recently lost out on track works tender for the RTS which is not surprising given the bilateral nature of projects, competition is stiff. As for the MRT3, so far there are no developments on the systems side (GKent’s arena) but progress elsewhere should inevitably lead to developments for systems as well.

Orderbook update. We estimate GKent’s outstanding orderbook for both hospital projects to be RM64m as of end March-21 while its LRT3 orderbook (JV-accounted) is at RM2.9bn. Both hospital projects should be on course for completion in June and Sept-2021. Additionally should the glove JV go ahead, GKent will be awarded a RM613m RPT contract of which RM213m is civil/infra nature.

LRT3 progress. Up to March-21, LRT3 has achieved an overall completion rate of 51% coming in slightly behind schedule. While the project is slated for completion in early-2024, the company may request for pandemic induced EOT which would delay completion to end-2024.

Metering. GKent’s metering arm was resilient amidst Covid-19. Growth came largely on the back of resilient demand from overseas and local markets as well as lower material and overhead expenses. Its domestic meter volumes managed to double on the back of new market penetration reaping benefits from its licensing agreement with Honeywell. Moving ahead, GKent foresees opportunities for penetration into Vietnam given the investments planned to further increase water access there.

Glove JV. GKent and Johan (JV partner) will be holding EGMs to secure approval for diversification into the glove business. The JV is in the midst of securing necessary approvals from MITI, FDA and European authorities, to our knowledge. Capacity targets for the end of this year are 6 lines out of the planned 42 (est. 1.7bn pieces pa.). Nonetheless, we believe with the onset of the total lockdown, capacity timeline could be further delayed.

Forecast. Tweak FY22-23 earnings down by -8.2/-0.3% after adjusting for LRT3JV assumptions.

Maintain HOLD, TP: RM0.78. Maintain HOLD with lower TP of RM0.78 (from RM0.85). Our TP is derived after pegging FY22 EPS to 8x P/E multiple. Overall, we see a longer term mixed outlook for its core business while we remain cautious on execution risks for the glove JV.

Source: Hong Leong Investment Bank Research - 8 Jun 2021