1Q19 CNP of RM18.9m came in broadly within expectations at 13% each of our/consensus estimates. No dividends declared, as expected. No changes to FY19-20E earnings. Upgrade to OUTPERFORM from UNDERPERFORM with a lower SoP driven Target Price of RM2.20 (previously, RM3.65).

Results broadly within. 1Q19 CNP of RM18.9m (excluding forex gains of c.RM2.7m) came in at 13% of our and consensus estimates. However, we deem the results to be inline as first-half performances are generally weaker and we expect a strong performance in 2H19. No dividends declared, as expected.

Results highlight. 1Q19 CNP only dipped 4% YoY despite a steep drop in revenue (-23%) as the impact was well cushioned by higher contribution from associates/joint-ventures level, which increased substantially by 479% thanks to the contribution from LRT3. The drop in revenue was driven by both its construction and metering divisions which we believe could be due to the timing of the billings for its on-going projects and meter orders. QoQ, 1Q19 CNP fell 69% underpinned by lower revenue (- 42%) mainly dragged down by its construction division, which saw 48% decrease in revenue, as they booked in several project completions in 4Q18.

Outlook. To-date, the total construction cost for LRT3 has yet to be finalized by Prasarana. Based on available data and news flow which we compiled, the construction cost for LRT3 has well exceeded RM9.0b. We are expecting the total cost for LRT3 to hover closer to RM14.0-15.0b, and we believe that the government will continue with the construction works of LRT3, as most of the contracts have already been awarded to various contractors and construction works are already in progress. While we think that LRT3 is likely to proceed, we highlight that there would be significant risk to earnings and valuations on the contrary. (Refer overleaf for more details).

Earnings estimates unchanged. Post results, we made no changes to our FY19-20E earnings.

Upgrade to OUTPERFORM. We are upgrading GKENT from UNDERPERFORM to OUTPERFORM but with a lower SoP-driven Target Price of RM2.20 (previously, RM3.65). To recap, we had previously called an UNDERPERFORM on GKENT due to its rich valuation as it traded up to FY19E PER of 17.3x. However, we see value emerging in the stock arising from the recent sell-down due to the negative news flow in the construction as several mega infrastructure projects have been scraped since the change in government. Our current TP of RM2.20 is based on; (i) 10x FY19E PER for metering, (ii) 9x FY19 PER for construction (lowered from 17x PER, previously in anticipation of low contract flows going forward), (iii) NPV of 6% PDP fees based on RM9b cost, and (iv) 30% discount to 1Q19 net cash, implying FY19E PER of 8.8x.

Key downside risks to our call are: (i) lower-than-expected margins, (ii) delay in construction works, and (iii) scrapping of LRT3 project by the government.

Source: Kenanga Research - 13 Jun 2018