Recently, we came back from GKENT’s briefing feeling reassured with our call and its prospects as management’s focus and outlook remain intact with no changes to FY20-21E earnings. Maintain OP with an unchanged SoP-driven TP of RM1.15. We also wish to highlight that GKENT did announced a 1.5 sen dividend in its recent results release, in line with our expectation of 3.6 sen for FY20, which was not reflected in our Results Note dated 25th September 2019.

Construction division. Management is hopeful that the design for LRT3 can be finalised by year-end, while renegotiating a new contract with its work package contractors. Upon completion of its redesign, management hopes to resume work in full-swing by early 2020. As for future jobs, management is actively 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 constantly been looking for opportunities to grow its metering division organically or through strategic tie-ups and acquisitions. We remain excited with the prospects of their metering division in the near term premised on management’s effort to: (i) increase their product range by introducing multi-jet, D-class volumetric and Solid State meters in the future, and (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 overseas as part of their strategy to expand their footprint beyond South-East Asia.

Earnings review. No changes to our FY20-21E earnings. However, we wish to highlight that GKENT did announced a dividend of 1.5 sen in its recent results release, in line with our FY20 expectation of 3.6 sen, which was not reflected in our Results Note dated 25th September 2019.

OUTPERFORM maintained. We reiterate our OUTPERFORM call and an unchanged SoP-driven Target Price of RM1.15 that is based on valuation base-year of FY21E 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 - 27 Sept 2019