GKent’s 1HFY22 earnings of RM22m were within expectations at 55% of forecasts. DPS of 1 sen was declared. Its existing construction projects and metering factory are running at 100% capacity. The sale of LRT3 stake which was finalised in mid-Oct carries earnings potential of RM20-25 p.a. However, this could be offset by its glove JV if executed well but we believe a gestation period is very likely. We are ceasing coverage on GKent due to reallocation of resources. As such, our forecasts, HOLD rating and TP of RM0.62 (8x PE on FY22 earnings) should no longer be used as a reference going forward.

Within expectations. GKent reported 2QFY22 results with revenue of RM79.7m (30.0% QoQ) and core PATAMI of RM10.0m (34.2% QoQ). This brings 1HFY22 core PATAMI to RM21.8m. Results were within expectations at 55% of our full year forecasts. 2QFY22 numbers were derived after adjusting for -RM9.8m worth of impairment arising from its LRT3 stake sale.

Dividends. First interim DPS of 1 sen was declared during the quarter going ex on 7 Dec-21.

QoQ. Core PATAMI fell by -15.4% despite revenue growth of 30.0% due to a combination of lower LRT3 JV contribution (-17.9%) and higher taxes (higher effective tax rate by +18ppts).

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

Construction. GKent’s completion rates for the Putrajaya and Tanjong Karang hospitals have reached 84% and 78% respectively (latest guidance). Barring any surprises, the hospitals are likely to complete by CY22. As for its glove factory construction, progress has reached 19% as of end Oct-21. All of its existing jobs are operating at 100% capacity currently. With the sale of its LRT3 stake in mid-Oct, GKent will see a loss of JV earnings contribution of RM20-25m in potential annual earnings by our estimates. 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 by 17 Aug- 21. 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. The first dipping line is expected to commence operations by end Nov-21 with a target to commission four lines by early Feb-22. 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).

Investment arm. Along with the earnings release, GKent signalled intentions to set up an investment arm that will serve as an innovative platform for the group to gain access to new and emerging technologies. Focus will be on early stage tech start-ups in Southeast Asia. With this venture, GKent intends to be a global industry-leading technology company.

Forecast. Unchanged.

Cease coverage. We are ceasing coverage on GKent due to reallocation of resources. As such, our forecasts, HOLD rating and TP of RM0.62 (8x PE on FY22 earnings) should no longer be used as a reference going forward.

Source: Hong Leong Investment Bank Research - 24 Nov 2021