9M18 CNP of RM75.1m makes up 59%/67% of our/street’s fullyear estimates. We deem it broadly inline as we are expecting a stronger performance in 4Q18. To recap, its 9M17 CNP only made up 55% of FY17 CNP. Second interim dividend of 2.0 sen declared with 9M18 dividend of 4.5 sen, on track to meet our full-year expectation of 7.8 sen. No changes to FY18-19E earnings. Maintain OUTPERFORM with an unchanged SoPdriven Target Price of RM3.65.

Broadly inline. 9M18 CNP of RM75.1m constitutes 59%/67% of our/street’s full-year estimates. We deem it as broadly inline as we are expecting a stronger performance in 4Q18. To recap, its 9M17 CNP only forms 55% of its FY17 CNP. Second interim dividend of 2.0 sen declared, bringing 9M18 dividends to 4.5 sen which is on track to meet our full-year expectations of 7.8 sen.

Results highlight. 9M18 CNP grew 32% YoY driven by: (i) revenue growth of 8% backed by its engineering (+3%) and metering (+27%) divisions, (ii) improvements in pre-tax margins to 21% (+2ppt) also due to both divisions above. The improvements in pre-tax margins were also due to higher contribution from its associate/joint-venture (+67%). QoQ, its 3Q18 core PATAMI grew 30% despite revenue declining 32% due to the impressive improvement in pre-tax margin of Engineering segment to 29% (+11ppt), which we believe could be largely due to variation order claims or from advance works done for its on-going projects.

Outlook. We continue to believe that LRT3 will see an upward revision in construction cost of RM9.0b due to higher building material and labour, which would be a key re-rating catalyst for GKENT, as they will be benefiting from the 6% PDP fees. That aside, its outstanding order-book currently stands at RM5.7b (inclusive of LRT3) providing earnings visibility for the next 2-3 years, and coupled with growth in metering division, we believe that GKENT is set to deliver another record high earnings in FY18.

Earnings estimates unchanged. Post results, we made no changes to our FY18-19E CNP estimates as we are expecting a strong performance in 4Q18.

Maintain OUTPERFORM with key re-rating catalysts being potential cost escalation in LRT3 project. Our TP of RM3.65 is based on: (i) 14x FY19E PER for metering, (ii) 17x FY19 PER for construction, (iii) NPV of 6% PDP fees based on RM9b cost, and (iv) 30% discount to net cash. Implied FY18-FY19 PERs of 16.2-14.5x are not excessive given its net cash position.

Key downside risks for our call are: (i) lower-than-expected margins, and (ii) delays in construction works.

Source: Kenanga Research - 6 Dec 2017