GKent reported 1QFY22 earnings of RM11.8m which was within our expectations driven by steady contribution from metering segment. In our view, GKent could sell its 50% LRT3 JV stake once the valuation exercise completes by next month which carries an estimated profit contribution of c.RM20m p.a. Shortfall could be partially cushioned by its 40% owned glove JV which might commence commercial production next month. Maintain forecasts and HOLD rating with unchanged TP of RM0.78. Overall, we see a longer term mixed outlook for its core business while we remain cautious on execution risks for the glove JV.

Within expectations. GKent reported 1QFY22 results with revenue of RM61.3m and core earnings of RM11.8m. The core earnings accounted for 23% of our forecasts for FY22 falling in-line with expectations.

Dividends. No DPS Was Declared for the Quarter.

Change of year end. GKent has changed its year end from January to March. Hence no QoQ and YoY comparison can be made.

Construction. We estimate GKent’s outstanding orderbook for both hospital projects to be RM36m as of end June-21 while its LRT3 orderbook (JV-accounted) hovers around RM2.8bn. Both hospital projects should be on course for completion this year. In our view, GKent could sell its 50% LRT3 JV stake once the valuation exercise completes by next month which represents an estimated lost earnings of c.RM20m p.a. In the meantime, GKent is keeping busy executing its glove construction contract (c.RM600m) for its 40% owned JV. GKent has not secured any external jobs since LRT3, missing out on various tenders. Based on previous guidance, GKent’s participation in multiple WTP tenders are still awaiting decision.

Manufacturing. GKent’s metering arm has returned to 100% operations last week. We continue to expect the segment to 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. Construction of the factory is at an advance stage and management expects its 40% owned JV to commence commercial production next month. GKent originally targeted to start construction in July-21 with 1st line installed by August-21 to which we anticipated delays on the back of lockdowns (EMCO and Phase 1).

Forecast. Maintain Forecasts With Earnings In-line.

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 - 25 Aug 2021