• Maintain NEUTRAL, higher TP of MYR1.08 from MYR1.00, 4% upside. After meeting management, we came away slightly more upbeat on George Kent’s mid-term outlook. Shifting focus back to its water metering roots, we believe the company could benefit from the implementation of water projects and smart meters. We expect 2HFY20 (Jan) earnings to improve on similar construction billing coupled with margin improvements in the metering segment – on lower brass prices. We maintain our call at this juncture, awaiting a positive outcome for water reform.
• A better 2HFY20. Brass prices improved in 3QCY19, reassuring that margin recovery in the metering segment is likely in 2HFY20 (1HFY20 PBT margin: 15.5% (-6ppts from 1HFY19). Other than that, we think LRT3 will have minimal contribution to FY20 earnings. YTD, its share of the JV results was a loss of MYR0.2m (1HFY19: MYR14.3m gain). Overall, we expect 2HFY20 to be stronger on similar construction billing, coupled with higher export sales margin improvements in the metering segment – on lower brass prices.
• Near-term opportunities across regions. Current tender book of MYR2.5bn consist of water infrastructure worth MYR1.5bn (ie Papua New Guinea – O&M contract extension and water treatment plant, or WTP) and railway contracts worth MYR1bn (ie, Singapore LTA and Bangkok Orange Line 2nd Phase track works). We maintain our new contract win assumption, expecting George Kent to secure MYR300m worth of new contracts during FY20F-22F, particularly for the construction of WTPs. Outstanding construction orderbook of >MYR5bn comes mainly from the MYR4.6bn LRT3 project.
• Smart Metering solution could drive a new leg up. Earnings uplift may come from the metering division from FY21. This will be mainly driven by potential sizable orders of its automated meter reading (AMR) solutions for smart meters in commercialisation efforts. Selangor recently completed the proof-of-concept project and is currently trialling its pilot project. Management expects to secure orders for 140,000 smart meters in FY21 – where as many as 120,000 pieces could come from Selangor if the pilot project is successful. This translates to an 8-10% contribution to FY21 core earnings, based on our calculation. We note five out of 13 states have ongoing/completed proof-ofconcept, and are likely to follow with a pilot project.
• Earnings revisions. FY20F earnings are cut by 9.9%, but we lift FY21F-22F by 5.5-5.6% after adjusting for the construction billing schedule and imputing the earnings contribution from its AMR/smart meters. We roll forward our base year to FY21F to better reflect the water metering business, while maintaining our target P/E of 9x (-1SD from its 10-year average forward P/E of 12x). Upside risks to our earnings include better-than-expected new contract wins and stronger regional demand for smart metering solutions. Downside risks are 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 - 26 Sept 2019