• Stay NEUTRAL with MYR1 TP, 6% downside with 4% FY20F yield. Our target P/E of 9x is at -1SD from its 10-year average 1-year forward P/E of 12x. While George Kent could benefit from the implementation of water projects and smart meters, the outcome of Malaysia’s water restructuring exercise remains unclear. Should the outcome be positive, paving the way to higher development allocation for the sector, we would review our assumptions for George Kent.

• Water M&E business overlooked. George Kent’s role as a provider of mechanical and engineering (M&E) works for water-related projects such as water treatment plants (WTPs) and dams have largely been overlooked by investors, in our view. The company undertook its first water-related M&E project in 1986. To date, it has completed over 30 projects, valued at close to MYR1bn, giving it extensive M&E experience in the water sector.

• Potential beneficiary of water related projects. A positive conclusion to Malaysia’s water restructuring exercise could lead to an increase in development expenditure for water projects, eg WTPs, reservoirs, raw water transfer projects, and water pumping stations. This may present contracting opportunities for George Kent as a vertically-integrated service provider – given its expertise in M&E, civil engineering and water metering & valve manufacturing – we believe this would be a rerating catalyst for the stock.

• Curbing NRW through smart meters. The company is among key suppliers of water meters to Hong Kong and Singapore. High-quality water meters are essential in obtaining accurate water consumption reading, which improves billing for utility companies. Smart meters, on the other hand, have the added capability to present remote real-time data and detect leaks to reduce non-revenue water (NRW). Its smart metering solutions are currently undergoing pilot tests. Large-scale application could take place within the next 2-3 years, presenting possible upside to the water meter manufacturing business.

• LRT3 to resume in 2H19. Negotiations are underway and are estimated to complete by mid-2019, allowing works to resume in 2H19. Its outstanding construction orderbook stood at >MYR5bn as of January, with a large portion comprising the LRT3 turnkey project.

• Key assumptions and risks. We expect George Kent to secure MYR300m worth of new contracts during FY20F-22F, particularly for the construction of water treatment plants. Risks to our call include cost overruns on the LRT3 project, a prolonged slowdown in construction activities, and a low win-rate in the open tender system.

Source: RHB Securities Research - 4 Jun 2019