9M19 CNP of RM59.4m came in below expectations, making up only 68% of both our and consensus full-year estimates. Second interim dividend of 1.5 sen declared, bringing year-todate dividends declared to 3.5 sen. Lowered FY19-20E earnings by 15-13% after factoring slower billings progress and cutting our replenishment assumption by RM350.0m. Maintain MARKET PERFORM with a lower SoP-driven Target Price of RM0.845 (previously, RM1.20).

Below expectations. 9M19 CNP of RM59.4m came in below expectations, making up only 68% of our and consensus full-year estimates. We believe the negative deviation is mainly due to lower-thanexpected construction billings progress for its other on-going projects, i.e. hospitals. Second interim dividend of 1.5 sen declared, bringing year-todate dividends declared to 3.5 sen, which we deem as in line with our fullyear expectation of 5.5 sen.

Results highlight. Its 9M19 revenue registered a decline of 29%, dragging its CNP down by 21%, YoY. Revenue for its engineering division dropped by 33%, as they did not have any project handovers as compared to the previous year, and as for its metering division, it was primarily due to slower sales, which we believe could be due to the change in government. QoQ, 3Q19 CNP is down by 22% underpinned by: (i) lower revenue (-8%) as its construction division saw a decline in revenue of 18%, (ii) decrease in associate contribution (-19%) due to the cost review of LRT3, and (iii) a sharp increase in the effective tax rate to 41% (+23ppt) due to taxes that were under-provisioned in previous years.

Outlook. Recently, GKENT-MRCB JV has successfully negotiated with the government to convert their PDP role for LRT3 into a fixed price contract of RM11.9b, and we are positive with that outcome as it is still higher than our assumption of RM9.0b, bringing its outstanding order- book to c.RM5.5b. While its near-term prospects seem less exciting arising from the delays in LRT3, we believe this particular project would be one of GKENT-MRCB JV’s strongest job-profile in the future should they are 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 estimates review. Post results, we reduced our FY19-20E earnings by 15%-13%, respectively, after factoring in slower billings from its existing projects and we have also removed our order-book replenishment assumptions by RM350.0m, as we expect GKENT to focus on the execution of LRT3. As a result of our cut in earnings, our dividend is lowered from 5.5 to 5.0 sen.

Maintain MARKET PERFORM. Following our earnings review, we lowered our SoP-driven Target Price to RM0.845 (previously, RM1.20) as we included LRT3 as part of its construction division (previously, under PDP) coupled with a company holding discount of 20%. Our TP implies FY19E PER of 6.3x, in-line with our ascribed multiple of 6.0-10.0x within the construction space.

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 - 20 Dec 2018