1) INTRODUCTION

George Kent has 2 divisions, namely "engineering" & "metering" divisions.

ENGINEERING DIVISIONS:
a) Rail Transportation - Overall system work integrator; design & build, project delivery partner.

b) Water Infrastructure - Turnkey contractor in water treatment plants, intakes & pumping station; solution provider for water efficiency management system. dd

c) Healthcare -  New entry in the healthcare sector by constructing hospitals.  

METERING DIVISIONS:

a) Meters - Supplier & distributor of water meter solutions for residential, commercial & industrial use.  

b) Manufacturing - Manufacturing of brass products & components.

c) Industrial - Distribute non-meter products and industrial equipment      

a) Sales & Profits

George Kent's Q2FY18 net profit has improved 24% y-o-y to rm25.37 mil (Q2FY17 rm20.51 mil), supported by growth in both engeneering & metering divisions. 

b) Net Profit Margins

George Kent's Q2FY18 net profit margin has improved y-o-y to rm13.53% (Q2FY17 at 12.45%), this is a healthy indicator that the management is proactive in operational efficiency, implementing stringent cost management and improving product quality across both engineering and metering divisions.

c) Healthy Cash Level

As of Q2 (31 Jul 2017) financial report, George Kent has a healthy cash level of RM422.94 million (RM0.75 per share), while its total debts amount to RM48.30 million, a net cash position of RM374.64 million (Q1 at RM363 million), an improvement of RM11 million. 

With this hefty cash level, George Kent can pull the trigger to engage in any Merger & Acquisition (M&A) activities that add value to the company. In addition, the company can bid for larger projects in view of its strong cash flow for hiring workers, leasing construction equipments & materials. 

3) Strong Orderbook

Currently, George Kent has a balance orderbook of RM5.93 billion, the company's earnings visibility remains intact for the next 5 years.

As the company completes its work progressively, unbilled orderbook will be recognized, contributing to topline and bottomline growth in financial performance. Do take note that the company overall sales for FY17 amounts to RM599m, this clearly indicates that the buik of the orderbook is yet to be recognized. The future looks promising for the company. 

Please refer to my previous post to gain more info regarding George Kent's bright outlook. https://klse.i3investor.com/blogs/investmentopportunity/132624.jsp 

4) Valuations 

For FY17, George Kent made RM599 million in sales, with a net profit of RM101 million (EPS: RM0.18). For FY18, I would expect the company to register 20% increase in net profit, supported by:

a) Remaining variation order for LRT Line Extension which is likely to be captured fully in this financial year 

b) Acceleration of LRT 3 construction work which will further increase the company's PDP fees

c) 23% y-o-y profit increase for Q1FY18, and 24% y-o-y profit increase for Q2FY18, meeting expectations.

d) Balance orderbook of RM 5.93 billion. 

The company should be able to make RM120 million net profit (EPS of RM0.21) for FY18. In my opinion, I am of the view that the investment community (fund managers / private investors) should re-rate George Kent with a higher Price-Earnings Muitiple of at least 18x. Given the fact that several large construction companies whose future remains promising, but at the moment do not enjoy higher earnings like George Kent, are currently trading at higher multiple (Gamuda PE 21, Sunway Construction PE 21, Ekovest PE 21).   

However for now, I would just stick to its current Price-Earnings-Multiple of 16x. As for valuation, with a Price-Earnings Multiple of 16x (historical PE / fair PE multiple below big-cap stocks), George Kent should be trading at RM3.40. From current price of RM3.08, there is 10% upside for this stock. 

Any downside risks would be a) Delay in construction work; b) Poor cost management due to escalation of construction materials / foreign labour cost; c) Poor site management.

Note: For fund managers who are reading this, if there is any job opportunity of "Equity Analyst" in your company, I would love to explore this opportunity. Please kindly email me at: writetogeorgeleong@hotmail.com

This article is for educational purpose only. Please conduct your own due diligence before buying / selling any company shares.