• SELL, MYR0.50 TP implies 29% downside. Management’s latest update indicates that construction activities should remain subdued in the upcoming months. George Kent Malaysia has suspended dividend payments to preserve cash. While it trades at 7.3x FY22F (Jan) P/E – broadly in line with small-cap construction peers – we attribute the disconnect between our ascribed FY22F target P/E of 5.5x to unjustified optimism, as revenue should decline, along with unattractive earnings growth and in tandem with orderbook replenishment concerns.

• Construction progress to lag expectations. Construction works for the Endocrine Hospital have only progressed by less than c.3% in the first two months of 2020, due to complications with approvals. Management expects two additional extensions of time (EOT) on top of the second EOT to August (initial completion date: Jan 2020) – due to the delayed approval of medical equipment and the Movement Control Order (MCO). We understand that the subsequent months also saw minimal progress alongside other construction projects due to the MCO, and believe it is likely to persist on the back of the mandatory COVID-19 swab test for foreign workers nationwide.

• Outstanding orderbook of MYR4.6bn as at Feb 2020 consists mainly of the Light Rail Transit Line 3 (LRT 3) JV project valued at MYR4.35bn (Figure 1). This indicates a 27% completion rate, which supports our view that it is likely to miss the 40% completion target set earlier. We understand that the only activities allowed during the MCO period are safety works.

• Water metering segment to stay resilient. The plant resumed operations on 20 Apr after a full shutdown, and its utilisation rate is currently at 85%. We understand that sales orders remained constant despite the global pandemic, but there were delivery issues during the lockdown. On a positive note, brass prices have declined, due to the recent collapse of oil prices – which should help support margins. We note that 2.1m water meters were supplied in FY20 (FY19: 2.4m). Management has yet to revise its guidance on the 140,000 smart water meter sales for FY21F (vs our assumption of 80,000).

• TP still at MYR0.50. Our FY21-23F earnings remain largely unchanged (-2%/-1%/2%). We maintain our ascribed target P/E of 5.5x for FY22F (at -1SD from its 5-year mean). The stock lacks visible re-rating catalysts, given the unfavourable ripple effect caused by the recent oil price collapse, leading to greater uncertainty on the Government’s ability to fund infrastructure spending, and unclear policy imperatives.

• Key upside risks include stability in the macro economy, a positive outcome for water reforms, higher-than-expected earnings contributions from the LRT3 project, and further wins in water-related infrastructure construction.

Source: RHB Securities Research - 27 May 2020