Highlights

• Meeting with management. Last week we organised a meeting with the management of GKent which was represented by its Executive Director, Mr Bernie Ooi and Finance Manager, Mr Ong Kum Weng. The meeting was well attended by 17 fund managers and buy-side analysts.

• Shariah status woes. Questions were raised on GKent’s Shariah status for the upcoming review by the Securities Commission in Nov. Based on its latest audited accounts (FYE Jan 2016), GKent’s conventional cash over total assets stood at 35.4%. As this exceeds the 33% threshold, we reckon that GKent is likely to be removed from the Shariah list during the upcoming review. We understand that part of its cash will be transferred into Islamic accounts. Management guided that its financials should be Shariah compliant by end FY17 annual audited accounts (Jan).

• Record orderbook. Following last week’s Tg Karang Hospital contract (RM277m), GKent’s YTD job wins now total RM771m . We estimate its orderbook to stand at an all-time high of RM5.7bn. This implies a cover of 13.9x on FY16 construction revenue, the highest ratio within our sector coverage. Looking ahead, we expect GKent to secure another hospital job (RM300-350m) in Putrajaya where it already holds the Letter of Intent (LOI).

• More rail prospects. GKent is exploring job opportunities with Prasarana such as MRO (maintenance, repair and overhaul) and upgrading for the original Ampang and Kelana LRT lines. Aside that, it was recently announced that the RM55bn East Coast Rail Link (ECRL) will be built by China’s CCCC. We view GKent as a potential beneficiary of the ECRL via subcontracts for systems and track works. Interestingly, CCCC is also GKent’s JV partner for the MRT2 track works.

• A step closer in Selangor. Management shared that it recently received an order for 20k units of water meters in Selangor, to be delivered on a fast track basis. While the order is small, we believe this paves way for an eventual annual supply contract potentially amounting to 400-500k units. Tenders for this contract are expected to close in a month.

Risks

• Any possible delays in the LRT3 would be the key risk.

Forecasts

• Our previous forecast was too conservative as (i) 1H results already made up 67% and (ii) management’s guidance for a stronger 2H. We raise FY17-19 earnings by 20%, 12% and 5% respectively after imputing the Tg Karang Hospital, higher engineering margins and stronger progress billings.

Rating

Maintain BUY, TP raised to RM3.77 (+41% upside)

• GKent is a key rail play with exposure to the LRT extension, LRT3 and MRT2. It also boasts solid financials with 3-year earnings CAGR of 28%, above industry ROE of 18.4% and net cash of RM0.64/share (24% of market cap).

Valuation

• Aside the earnings upgrade, we also raise our P/E target from 14x to 15x in view of GKent’s promising outlook as a key rail play. Our SOP based TP is accordingly raised from RM3.25 to RM3.77.

Source: Hong Leong Investment Bank Research - 8 Nov 2016