GKent announced the sale of its 50% stake in the LRT3 JV to MRCB for a cash consideration of RM53m post-independent valuation exercise. Based on our FY22 forecast, stake is being sold at an implied FY22 P/E multiple of 2.6x and 0.93x on a P/B basis. We note that none of the proceeds has been earmarked for special dividends. Post-sale, we cut GKent’s FY22-24 forecasts by 21-50% and our TP falls to RM0.62. As for MRCB, we increase our FY21-23 earnings forecasts by 33-76%, our SOP-driven TP rises marginally to RM0.43. The exercise increases MRCB’s susceptibility to late payments. Maintain HOLD on both stocks. We maintain our NEUTRAL sector weight despite record high DE allocation in the 12MP due to lack of new mega projects and back-loaded DE allocation.

NEWSBREAK

GKent announced that it has accepted an offer from MRCB to sell its 50% stake in MRCB-GK, which is the appointed turnkey contractor for the LRT3 project for a cash consideration of RM53m. The transaction is scheduled to complete within 30 days of acceptance which is 27 Oct-2021. The LRT3 project has achieved an approximately 58% completion rate and is scheduled to complete in Feb-2024.

HLIB’s VIEW

Details. The offer price values the entire LRT3 JV at RM106m (100%) arrived at after independent valuation exercise undertaken by EY. Based on our forecast of FY22 net profit contribution to GKent of RM20.7m, the stake is being sold at an implied FY22 P/E multiple of 2.6x and 0.93x on a P/B basis (based on GKent’s announcement).

Impact on GKent. As a result of the sale, GKent will be recognising a loss on disposal of RM4.2m. Net of arbitration costs (RM2.2m), cash inflow amounts to RM51m to be utilised as working capital by 31 Mar-22. None has been earmarked as special dividends to shareholders. GKent’s net cash position is expected to improve from RM0.26/share to RM0.35/share post-transaction. We do not rule out the possibility of distribution due to its idle cash pile. As for earnings, stripping off contribution from the LRT3 JV translates to a cut in our FY22/23 earnings forecasts of -21.3%/-50.6%. Note that we have not incorporated contribution from its glove JV due to execution risks. Our TP falls to RM0.62 (from RM0.78) post-earnings cut, derived based on FY22 EPS pegged to 8x P/E multiple. Maintain HOLD; TP: RM0.62.

Impact on MRCB. Acquisition will be satisfied by cash which does little to dent MRCB’s net gearing position, relatively unchanged at 0.23x. However, we expect this to worsen given its new position as sole party to the turnkey which also makes it more susceptible to late payments. Going forward, MRCB will consolidate the LRT3 JV which lifts our FY21/22/23 earnings forecasts by +75.9%/40.4%/33.5%. Post-earnings adjustment, our SOP-driven TP increases marginally to RM0.43 (from RM0.41). Maintain HOLD; TP: RM0.43.

Maintain NEUTRAL. Despite record high DE allocation in the 12MP, we note the lack of new mega projects and back-loaded DE allocation. Nonetheless, we believe mega jobs could be announced on a rolling basis moving forward but timing is uncertain due to: (i) fluidity of government finances (recovery timing etc.) (ii) elevated input costs and (iii) maximising PFI in funding structure. We look to Budget 22 for further clarity on status of sizable projects. We maintain NEUTRAL on the construction sector.

Source: Hong Leong Investment Bank Research - 29 Sept 2021