Gkent’s 1HFY21 earnings of RM12.5m (-49%) were within our and consensus expectations. Core PATAMI decline was driven by lower contribution from engineering and metering segments as operations was impeded by the MCO. We estimate the company’s construction orderbook (ex-LRT3) amounts to c.RM240m (cover ratio of 1.1x). Operations are gradually normalising for both segments. Maintain forecasts and SELL rating with same TP of RM0.52 after pegging FY22 EPS to 6.6x PE multiple (-1SD below 3-year mean).

Within expectations. GKent reported 2QFY21 results with revenue of RM70.2m (- 28.2% QoQ, +78.5% YoY) and core earnings of RM8.7m (+134.6% QoQ, -20.9% YoY). This brings 1HFY21 core earnings to RM12.5m, decreasing by -49.2% YoY. The core earnings accounted for 44.6% of our full year forecast (consensus: 38.1%), which is within expectations as we are anticipating a stronger 2HFY21.

Dividends. DPS of 1 sen going ex on 30 Sep-2020 was declared (1HFY21: 1 sen; 1HFY20: 1.5 sen).

QoQ. Core earnings more than doubled to RM8.7m from RM3.7m in 1QFY21 as topline recovered by 78.5%) as both construction (+78.2%) and manufacturing (+78.8%) segments restarted operations in June and April respectively.

YoY/YTD. Core earnings shrunk by -20.9% and -49.2% respectively as performance was largely hit by MCO. This was reflected in lower revenue which fell by -28.2% YoY and -39.4% YTD as operations for both construction and manufacturing segments were significantly disrupted.

Construction. We estimate GKent’s outstanding order book (ex-LRT3) amounts to c.RM240m which translates into cover ratio of 1.1x (based on FY20 construction revenue). On an YTD basis, revenue and PBT declined by -50.2% and -66.5% respectively owing to the MCO induced stop work order. Construction works for its hospital projects have resumed since mid-June upon screening of all foreign workers. GKent was granted EOT for both its hospital projects (EOT of 90 days was given to all government projects). Earnings recognition for its LRT3 JV remains marginal (1HFY21: RM0.5m; 1HFY20: -RM0.2m) as supplemental agreements continue to be ironed out. We believe earnings recognition from the JV will be marginal until end CY20.

Manufacturing. YTD, revenue and PBT declined by -17.6% and -4.5% respectively. GKent’s metering segment is seemingly more resilient as the company managed to resume operations early on 20th April 2020 limiting its idle period to only 1 month. Hence, for 2QFY21 its manufacturing facility was fully operational albeit at a smaller scale. According to management, orders were largely uninterrupted by Covid-19 and GKent is now focused on clearing its backlog of orders.

Forecast. Maintain as the Earnings Were Inline.

Maintain SELL, TP: RM0.52. We remain concerned on its thinning order book and limited replenishment potential. 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 order book and cloudy job visibility.

Source: Hong Leong Investment Bank Research - 15 Sept 2020