Recently, we met up with GKENT’s management for an update and came back feeling reassured with its prospects. Management is hoping to finalise the design for LRT3 by year end and resume work in full-swing by early 2020. As for its metering division, we are optimistic with the potential for their smart meters, being an essential part of the Internet of Things trend. Reduced FY20-21E earnings by 27-24%, respectively as we reschedule our billings recognition for LRT3. Maintain MP with an unchanged SoP-driven TP of RM1.15.

Construction division. For LRT3, management indicated that they are finalising the design for the project while renegotiating a new contract with its work package contractors. In terms of timeline, management aspires to finalise the design by year-end and resume work in full-swing by early 2020. Apart from its existing construction jobs, management are participating in more water and rail-related projects, i.e. water treatment plants overseas and locally with a total tender book of RM3.5b. The rail projects eyed in the near term are mostly from overseas i.e. Singapore LTA Track Works, and Bangkok Orange Line 2nd Phase Track Works.

Metering division. GKENT has always been looking for opportunities to grow it metering division organically or through strategic tie-ups and acquisitions. We are excited with the prospects of their metering division in the near term premised on their effort in (i) increasing their product range by introducing multi-jet, D-class volumetric and Solid-State meters in the future, (ii) expanding market reach by signing long-term license agreement with Honeywell for a license of the technology and know-how to manufacture high-precision water meter measuring components for the V100 and V110 C-Class volumetric water meters, and (iii) introduction of their own Automated Meter Reading (AMR) Solution for the smart meters they hope to roll out into the market by 2020. Lastly, we do not rule out the possibility of acquisition of water-related companies from overseas as part of their strategy to expand their footprint beyond South-East Asia.

Earnings review. While we are feeling more positive with GKENT’s prospects, we lower our FY20-21E earnings by 27-24% as we were a tad too optimistic with our billings recognition for LRT3 previously.

MARKET PERFORM maintained. We reiterate our MARKET PERFORM call and an unchanged SoP-driven Target Price of RM1.15 that is based on valuation base-year of FY21E (previously, FY20E) as we believe its prospects remain promising albeit weakness in earnings. Our TP implies FY21E PER of 7.8x which is in-line with our ascribed multiple of 6.0-11.0x within the construction space.

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

Source: Kenanga Research - 13 Aug 2019