1H19 CNP of RM41.6m came in below expectations at 29%/31% of our/consensus estimates. The 2.0 sen dividend declared is lower than our full-year expectation of 8.8 sen. No changes to FY19-20E earnings. Maintain OUTPERFORM with an unchanged SoP-driven Target Price of RM2.20 but looking to review our earnings/call/TP post results briefing.

Below expectations. 1H19 CNP of RM41.6m (excluding forex gains of c.RM4.5m) came in below expectations, making up only 29%/31% of our and consensus estimates. We believe the disappointment stemmed from the on-going project review on LRT3, which led to a lower contribution from the project. The 2.0 sen dividend declared was also short of our fullyear expectation of 8.8 sen.

Results highlight. 1H19 CNP only dipped 5% YoY despite a steep drop in revenue (-33%) as the impact was well cushioned by higher contribution from associates/joint-ventures which increased substantially by 242% thanks to the contribution from LRT3 coupled with a lower effective tax of 17%. 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 on-going projects and meter orders. QoQ, 2Q19 CNP grew 21% backed by the improvement in revenue (+13%) from both divisions, i.e. engineering and metering coupled with improvements in operating margin by 6ppt to 19% which we believe could be from variation orders from the LRT2 project.

Outlook. To-date, the total construction cost for LRT3 is still under review by the government, as it had exceeded the initial budgeted cost of RM9.0b to RM16.6b. While the final outcome from the government on the review of the project cost is pending, there is a significant downside risk to GKENT’s earnings prospect as they are unable to proceed with the project which makes up the bulk of its outstanding order-book of c.RM5.2b.

Earnings estimates to be reviewed. For now, we make no changes to our FY19-20E earnings, but we are looking to lower our earnings after getting more clarity from management in a results briefing today.

Maintain OUTPERFORM. We keep our OUTPERFORM call on GKENT with an unchanged SoP-driven Target Price of RM2.20 for the time being, but look to review our recommendation and TP as we have get more clarity in the results briefing.

Key downside risks for 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 - 27 Sept 2018