Gkent’s 1QFY21 earnings of RM3.7m (-45% QoQ, -72% YoY) were below our and consensus expectations. 1QFY21 core PATAMI decline was driven by lower contribution from engineering and metering segments compounded by thinner realised margins as operations was impeded by the MCO. We estimate the company’s construction orderbook (ex-LRT3) amounts to c.RM280m (cover ratio of 1.3x). Operations are gradually ramping up for both segments. Cut FY21 earnings by 17%. Maintain SELL with same TP of RM0.52 after pegging FY22 EPS to 6.6x PE multiple (-1SD below 3-year mean).

Below expectations. GKent reported 1QFY21 results with revenue of RM39.3m (- 52.3% QoQ, -52.5% YoY) and core earnings of RM3.7m (-45.0% QoQ, -72.4% YoY). The core earnings accounted for a mere 11.3% of our full year forecast (consensus: 8.7%), which is below expectations.

Deviations. The results shortfall was primarily due to lower-than-expected revenue contribution and lower realised margins from both engineering and metering segments as a result of the MCO.

Dividends. No dividends were declared for the quarter (1QFY21: nil; 1QFY20: nil).

QoQ/YoY. QoQ and YoY, Core PATAMI decreased by -45.0% and -72.4% respectively as a result of the MCO which saw a complete suspension of operations for both segments during the quarter (starting 18th March).

Outlook. We estimate GKent’s outstanding orderbook (ex-LRT3) amounts to c.RM280m which translates into cover ratio of 1.3x (based on FY20 construction revenue). Construction works for its hospital projects are back online since second week of June upon receiving screening results for all foreign workers. Nonetheless, works resumption have been gradual and management reckons that pace of construction works may not normalise to pre-MCO levels due to SOP guidelines (social distancing measures) in-place. As such, we think that completion timeline for its hospital projects are likely to be extended to end CY21 in view of the pandemic. GKent’s metering segment is a brighter spark for the company having earlier resumed operations on 20th April albeit on a limited scale. The segment has since been gradually normalising its utilisation rate achieving slightly above 60% by early June (pre-MCO utilisation rate stood at 70-75%). In spite of the pandemic outbreak, according to management, orders have been robust for its metering segment where focus currently lies in executing its backlog of orders. Overall, given the dearth of railway construction contracts in the pipeline, we anticipate limited near term orderbook replenishment potential. While we foresee potential pump priming initiatives by the government moving forward, job award conversion is unlikely in the short term.

Forecast. Cut FY21 earnings by 16.5% after recalibrating the impact of MCO on construction progress billings, water meter sales as well as profitability margins.

Maintain SELL, TP: RM0.52. Despite our view of a likely resuscitation of pump priming initiatives by the government, we reckon earnings downside risks remain significant should job awards not materialise to arrest a rapidly thinning orderbook. Suspension of its dividend payments also brings risks to the downside. Maintain SELL with same TP of RM0.52 after pegging FY22 EPS to 6.6x PE multiple (-1SD below 3- year mean). We think its target P/E multiple of 6.6x is warranted given its thin outstanding orderbook and cloudy job visibility.

Source: Hong Leong Investment Bank Research - 30 Jun 2020