We remain cautious about the company’s prospects with little progress made so far on its job replenishment efforts amidst a thin orderbook. EOTs have been obtained for its hospital projects which stretches earnings contribution into FY22. We reckon negotiations with its LRT3 subcontractors may be finalised early next year. Demand for its metering segment has been resilient with healthy utilisation rates. Raise FY22-23 earnings by 5-10% but maintain SELL with higher TP of RM0.55 after earnings adjustment. Our TP is derived from pegging FY22 EPS to 6.6x PE multiple.

We Held a Virtual Meeting With GKent Recently With the Following Key Takeaways:

Construction. GKent’s outstanding order book (ex-LRT3) stands at c.RM240m, translating into a thin cover ratio of 1.2x of FY20 construction revenue. Its two hospital projects (c.RM215m) have seen construction progress normalising to close to pre-MCO levels. Nonetheless, we understand in addition to the automatic 3 months EOT provided, management is requesting for additional EOT of close to 5 months for both projects. On the tendering front, GKent recently submitted a tender for the Layang 2 raw water transfer project (c.RM120m). Additionally, we understand GKent has submitted pre-qualification tenders for multiple hospital projects (design and build basis) whereby some have been retendered from last year. Besides these, GKent is setting its sights on the KVDT2 (Dhaya Maju LTAT terminated as turnkey) once tenders are called. In our view, tender outcome for these projects could be further delayed due to Covid-19 resurgence.

LRT3. According to management, LRT3 order book now stands at RM4.1bn with an estimated completion rate of c.37%. So far, progress on its supplemental LRT3 agreements has been gradual. We believe a complete finalisation may only come early next year upon which meaningful earnings recognition from the project would commence (estimating between RM15-22m p.a). Payment-wise, Prasarana has been prompt having paid up to Sept-2020.

Metering. Despite the pandemic, GKent has seen resilient demand for its water meters resulting in healthy utilisation rate of c.80% (70-75% pre-MCO). Domestically, it has recently received orders for c.RM40m of NRW meters to be supplied to 600k homes across 6 states. As for its foreign markets, Vietnam has emerged as a major contributor. GKent recently launched its multi-jet offering in 3QCY20 (Myanmar, rural Vietnam and Philippines) with D-Class volumetric meters (Singapore, Hong Kong, Australia, Europe) slated for 4QCY20.

Forecast. We raise our FY22-23 earnings by 5.0% and 10.7% after factoring in recognition delays for projects and a leaner cost structure.

Maintain SELL, TP: RM0.55. Maintain SELL with a slightly higher TP of RM0.55 post earnings adjustment. Our TP is derived from pegging FY22 earnings to 6.6x target P/E multiple (based on -1SD to 3 year mean). We remain concern on its subdued near term job replenishment prospects amidst the pandemic compounded by its existing thin order book.

Source: Hong Leong Investment Bank Research - 22 Oct 2020