9MFY20 CNP of RM33.4m (-46% YoY) was below expectations, accounting for 56%/58% of our and consensus full-year forecasts. The weaker results were mainly attributable to lower contribution from the engineering segment. A quarterly DPS of 1.0 sen was declared, bringing YTD DPS to 2.5 sen. We have slashed our FY20-21E earnings by 25%/36%. Downgrade to MP (from OP) after cutting our SoP-derived TP to RM0.970 (from RM1.15).

Weak results. 9MFY20 CNP of RM33.4m (-46% YoY) accounted for just 56%/58% of our and consensus full-year forecasts. The weaker results were mainly dragged by the engineering division. A DPS of 1.0 sen was declared, taking YTD DPS to 2.5 sen.

Result highlights. 9MFY20 CNP plunged 46% YoY to RM33.4m as revenue dropped by 20% to RM253.4m. The engineering division was the main drag following its 44% decline in pretax profit and 27% drop in revenue. The metering segment also contributed less with pretax profit down 33% and revenue easing 5%. Both divisions saw lower pretax margins of 26.4% (from 34.4%) for the engineering segment and 16.4% (vs 23.2%) for the metering operation. QoQ, 3QFY20 CNP fell 26% mainly attributable to weaker engineering contribution with a pretax profit of RM8.9m (-48%), which was partly mitigated by better metering pretax earnings of RM6.0m (+38%).

Outlook. The slow progress to resume construction works for the RM11.4b LRT3 project (in which George Kent has a 50% interest) could be taking its toll on the Group’s performance. Since the renegotiation with the government to change the project structure from PDP model to “fixed price contract” basis in Jan 2019, there have been little developments on the outcome of its review with work package contractors for the previously awarded contracts, as works were initially targeted to resume in 4QCY19. In the meantime, the Group is taking the initiatives to grow its metering business with the signing of a long-term license agreement with Honeywell in June this year to manufacture high-precision water meter measuring components with exclusive rights to sell these water meters to 26 territories.

Earnings cuts. Following the results, we have slashed our FY20-21E earnings by 25%/36% after factoring in lower revenue recognition and slimmer margins.

Downgrade to MARKET PERFORM. We have trimmed our SoP-derived TP to RM0.970 (from RM1.15) mainly on the back of our earnings revisions. We have pegged PERs of 7.1x (1SD below mean) for the engineering business and 8.0x for the metering segment on their respective FY21 earnings (please see table overleaf).

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

Source: Kenanga Research - 19 Dec 2019