• Maintain NEUTRAL, with unchanged TP of MYR1.00, 4% downside. 1HFY20 (Jan) earnings deemed within expectations as we expect a stronger second half from the resumption of LRT3 billing and higher contribution from the water metering segment. Although the outcome of the country’s water restructuring initiative remains unclear, we believe George Kent could benefit from the implementation of water projects and smart meters. A positive outcome for water reform – paving the way for higher development allocation for the sector – could be a re-rating catalyst.
• 1HFY20 earnings broadly in line. George Kent reported 2QFY20 core earnings of MYR11.1m (-18.2% QoQ, -55% YoY). This contributed toward 1HFY20 earnings of MYR24.6m (-46.7% YoY), representing 39-40% of our and Street forecasts. We deem this broadly in line, as we expect a stronger second half. Interim dividend of 1.5 sen was declared vs 2 sen previously.
•  Lower margins observed in 1HFY20. The construction segment recorded revenue of MYR120.3m (-21% YoY), with PBT margin declining 5ppts to 28% (1H19: 33%), and PBT of MYR33.4m This was mainly due to billing of only two hospital projects – Hospital Endocrine and Hospital Tanjung Karang – and the tail end of the Light Rail Transit Line 2 (LRT2) project. For the same period, revenue contribution from the metering segment remained flattish at MYR60.2m (1H19: MYR59.8m), however, PBT declined 26% YoY to MYR9.3m, on weaker export sales and margins.
• Higher contribution expected from metering division in 2HFY20 on the recently secured export order that was initially anticipated to be awarded in the first half (pending clarity from management). We are positive on this as it instils confidence as to the competitiveness of water meter products across the region. More recently, George Kent entered a long-term licence agreement with Honeywell to manufacture high-precision water meter measuring components, which also allows exclusive sales of its water meter to 15 new territories in Asia. Additionally, management is eyeing potential construction jobs (ie Bangkok Orange Line 2nd phase) and water infrastructure jobs (ie new water treatment plants (WTPs) in Papua New Guinea). We await more details from management during the analyst briefing this afternoon.
• Key assumptions and risks. Our target P/E of 9x is -1SD from its 10-year average 1-year forward P/E of 12x. We maintain our earnings forecasts and expect George Kent to secure MYR300m worth of new contracts during FY20F-22F, particularly for the construction of WTPs. 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 - 25 Sept 2019