Maintain NEUTRAL, and a new MYR1.66 TP, from MYR3.82, with expected total return of 13%. 1QFY19 PATAMI met, at 19% of our full year forecast. The lower TP is from changes to our SOP valuation to reflect the construction industry's domestic operating landscape shift. This raises the question of earnings sustainability for the sector. We lower FY19F-20F earnings 1-4% on housekeeping. We see LRT3 PDP fee recognition (booked under a 50% JV) picking up. On the continuous effort to diversify earnings base, GKent is working to expand metering and water-related investments, organically (in the process of commercialising smart meters), and via M&As. Strong MYR5.3bn orderbook could keep its engineering segment busy for 3-5 years.

1QFY19 (Jan) revenue fell 23% YoY and 42% QoQ, as both engineering (-23% YoY and -48% QoQ to MYR73m) and metering (-22% YoY and -26% QoQ to MYR27m) segment chalked in lower revenue. The decline in engineering was from the completion of fewer projects in 2017, and 50% share contribution in Light Rail Transit 3 (LRT3) project delivery partner (PDP) role recognised under the JV line. PATAMI was +16% YoY to MYR21.5m, as the JV contributed PBT of MYR9.2m (1Q18: MYR1.7m, 4Q18: MYR7.9m). Yet, on sequential basis, it declined nearly 59%, primarily from lumpy recognition in 4Q18. No dividend was declared. Its balance sheet was healthy, with a net cash of MYR362m.

Adapting to the new environment. The engineering segment's activities for the next 3-5 years are anchored by its MYR5.3bn orderboook. The key question remains on earnings sustainability. The orderbook replenishment prospect could remain soft in view of the construction sector's current state, particularly rail-related projects. Balancing this is a continuous effort to further expand its metering business (working to commercialise smart metering products), organically and via M&A. Also, George Kent intends to grow recurring income in water-related investments. Pending more concrete development, we keep our growth forecast for this segment. We expect PATAMI to grow at an organic rate of 3-5%.

Maintain NEUTRAL. We revised our SOP valuation to arrive at a new MYR1.66 TP, with a 10x P/E for its metering segment FY19F PATAMI of MYR23m, switching from P/E to NPV at a discount rate of 13% for its engineering segment and adding the latest net cash of MYR362m. Our call is premised on the expectation that risk in the sector remains high in the nearterm. Our forecasts and valuation are built on the assumption that all existing engineering contracts and respective terms would remain unchanged.

Source: RHB Securities Research - 13 Jun 2018