We came back from a briefing feeling less excited with its near-term prospects as the project cost review on LRT3 took longer than expected, which hindered the group from proceeding with the construction works despite not being shelved by the government. Lowered FY19-20E earnings by 37-36% respectively. Downgrade to MP, with a lower SoPdriven TP of RM1.35 (previously, OP, TP: RM2.20).

LRT3 still under review. While Ministry of Finance (MOF) gave the green light to proceed with the construction works on LRT3, the project cost review and on-going negotiations between GKENT-MRCB JV with the government took longer than expected. Nonetheless, management remains hopeful that they are able to reach a conclusion with the government on their role in LRT3, which is highly likely to be converted from a PDP partner into a main contractor role. As for project cost review, management indicated that it would take 8-9 months for the GKENT-MRCB JV to finalise on the reduced project cost and only expect construction works to be back on full swing in 2HCY19.

Renewed focus on metering. As for its metering division, management aims to grow its metering contribution from 20% to 50% in the short term (2-3 years’ timeline) with acquisitions/strategic alliances forming part of their strategy to mitigate risks from the construction sector. That said, they also intend to introduce their proprietary Automated Meter Reading (AMR) or SMART Metering solution into the market which we believe would be the next big hit for the sector as it could assist the government is resolving non-revenue water issues in the future given their ability to provide customers with real-time access to water consumption data. We believe that demand will continue to outstrip supply and we maintain our metering division’s 10% growth assumptions in FY19.

Outlook. Currently, its outstanding order-book is c.RM5.0b of which LRT3 makes up 80%. GKENT-MRCB JV is working closely with the government in bringing down the cost of RM16.6b for LRT3 closer to its initial cost of RM9.0b. While its near-term prospects seem less exciting arising from the delays in LRT3, we believe that this particular project would be one of GKENT-MRCB JV’s strongest testament in the future should they be able to complete it with at a lower cost and within schedule, which would strengthen their foothold in the rail infrastructure scene in the future.

Earnings reviewed. Post briefing, we reduced our FY19-20E earnings by 37-36%, respectively, as we remove our FY19E order-book replenishment target of RM500.0m as we do not expect them to secure any construction jobs for the year and also pushed back our billings assumption for LRT3.

Downgrades to MP (from OP). Following our earnings review, we downgrade our call to MARKET PERFORM with a lower SoP-driven Target Price of RM1.35 (previously, RM2.20) on the back of: (i) lower construction earnings as we remove our RM500.0m replenishment assumption, and (ii) removed its net cash position from our SoP valuation in view of their high working capital requirement should they convert from PDP to a main contractor for LRT3 as they no longer earn a fee, while maintaining 10x FY19E PER for its metering business, and NPV of PDP fees for now until they successfully convert their status into the main contractor. Our TP of RM1.35, implies 8.6x FY19E PER which is close to its 5-year FWD PER average of 8.7x.

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

Source: Kenanga Research - 28 Sept 2018