1Q20 CNP of RM13.5m makes up 16%/ 19% of our and consensus full-year estimates. We deem that its results to be within expectations as GKENT’s results are generally weaker in first half, coupled that LRT3 work progress has yet to pick up in pace. No dividends declared as expected. No changes to FY20-21E earnings. Maintain MP with unchanged SoP-driven TP of RM1.15.

Results broadly in-line. 1Q20 CNP of RM13.5m makes up 16%/ 19% of our and consensus full-year estimates. We deem that its results to be within expectations as GKENT’s results are generally weaker in first half, coupled that LRT3 work progress has yet to pick up in pace. No dividends declared as expected.

Results highlight. 1Q20 CNP fell 28%, YoY attributable to: (i) decrease in revenue (-17%), (ii) losses contribution from its associate & joint venture contribution, (iii) higher effective tax rate of 25% (+9ppt). The decline in revenue was due to the decline in billings for its construction division coupled with slower sales in its metering division. The losses in associate contribution were due to the project cost review on LRT3, which resulted in a temporary halt in work progress for that project. QoQ, its 1Q20 CNP decreased by 29% due to similar reasons above except that it recorded lower effective tax in 1Q20 of 25% (-25ppt).

Outlook. For LRT3, we believe that the current progress is still at c.10%, but management remains optimistic in meeting the construction timeline as it has been rescheduled to 2024. As for its metering division, management is doubling their effort in promoting their smart metering solutions to various state governments and countries within the South East Asia region. Its smart meters are an add-on to existing meters that offers fixed network reading or mobile network reading allowing water players to bill customers effortlessly and we have built the potential into our estimates.

Earnings estimates unchanged. Post results, no changes to FY20-21E earnings.

Maintain MARKET PERFORM. We maintain our MARKET PERFORM call with an unchanged Target Price of RM1.15. We believe that its outlook is improving but still highly dependent on the execution of LRT3. Our TP implies FY20E PER of 7.8x, which is in-line with our ascribed multiple of 6.0-11.0x within the construction space.

Risks for our call are: (i) higher/lower-than-expected margins, and (ii) ahead of schedule/delay in construction works.

Source: Kenanga Research - 26 Jun 2019