GKent reported 14MFY21 earnings of RM49m which came in above our expectations driven by a better than expected LRT3 contribution. We anticipate weaker numbers ahead due to ongoing restrictions (MCO3.0 and FMCO). Estimated construction orderbook (ex-LRT3) amounts to a dwindling c.RM64m with earnings mix to be metering dominated moving ahead. Glove JV’s window of opportunity is narrowing with approvals from authorities pending, construction delays and declining ASP outlook, in our view. Maintain forecasts. Maintain HOLD with unchanged TP of RM0.78.

Better than expected. GKent reported 14MFY21 results with revenue of RM310.8m and core earnings of RM48.7m. The core earnings accounted for 112% of our forecasts for 14MFY21. Results beat were solely driven by stronger than expected contribution from its LRT3 project as earnings ex. JV and associates came in at 100% of our estimates.

Dividends. DPS of 1.0 sen going ex on 6 July 2021 was declared (14MFY21: 3.5 sen).

Change of year end. GKent has changed its year end from January to March. Hence no QoQ and YoY comparison can be made, being a “2-month quarter”.

Construction. 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 this year. Should its 40% owned glove JV proceed, GKent will be awarded a RM624m RPT contract of which RM213m is civil/infra nature. GKent has not secured any external jobs since LRT3, missing out on tenders of late. Some outstanding tenders the company is participating in include various Peninsular water-related and hospital jobs ranging from RM150-400m, Sarawak WTPs worth a combined RM1bn and Rasau Water Scheme.

Manufacturing. GKent’s metering arm remains resilient amidst ongoing difficulties with a 60% manufacturing cap. Nonetheless, we continue to expect the segment so remain steady in CY21 driven by continued penetration into new markets 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 has secured shareholders’ approval to venture into the gloves business. Approvals from MITI, FDA and European authorities remain pending. We believe approval process from the latter two could prolong given extra scrutiny on labour conditions of Malaysian manufacturers lately. GKent originally targeted to start construction in July-21 with 1st line installed by August-21 to which we anticipate delays on the back of lockdowns (MCO3.0 and FMCO) and capacity constraints. All this coupled with declining ASP outlook could see GKent’s window of opportunity narrowing.

Forecast. Maintained as we have earlier cut earnings in anticipation of the lockdown.

Maintain HOLD, TP: RM0.78. Maintain HOLD with unchanged TP of RM0.78 as we make no changes to our forecasts. 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 - 22 Jun 2021