Results

• GKent reported 1QFY18 results with revenue of RM129.4m (-32% QoQ, +5% YoY) and core earnings (ex. forex) of RM21.4m (-42% QoQ, +36% YoY).

Deviation

• 1Q core earnings made up 23% of our full year estimates. We consider this being above our expectations after accounting for the fact that 2H generally tends to be stronger. To illustrate, 2H contributed 63-64% of full year earnings for FY16-17.

Dividends

• None declared for the quarter. Final dividend of 5 sen previously declared goes ex on 28 June (next Wed).

Highlights

• Engineering performance continues. Engineering revenue was flat YoY while margin (ex. JV and associates) expanded slightly from 20.8% to 21.5%, increasing PBT by 3%. The QoQ decline in revenue and PBT by 39% and 55% is not a concern given the high base last quarter (4Q is traditionally the strongest).
• LRT3 to take off soon. GKent has yet to book in any PDP fees from the LRT3. We understand that the JV profits recorded so far (RM1.3m in 1QFY18 and RM8.2m last year) are mainly for reimbursable costs for the project. Tenders for several viaduct packages have been called and we expect awards to materialise sometime in 3Q17. While not confirmed, we gather that the value of the LRT3 could be increased from RM9bn to RM12bn after taking into (i) higher cost environment since the PDP award in Sept 2015 and (ii) additional work scope required.
• Strong metering delivery. Although metering revenue rose 22% YoY, PBT grew by a much larger magnitude of 160% as margin more than doubled from 13.2% to 28.2%. We reckon this is due to more domestic deliveries which generally command higher margins.

Risks

• Delays in the rollout LRT3 would be the key risk.

Forecasts

• Given the stronger than expected results, we raise FY18-19 earnings by 8% and 7% respectively. Rating Maintain BUY, TP raised to RM5.60
• GKent is a key rail play with exposure to the LRT extension, LRT3 and MRT2. We believe it is in a prime position to participate in upcoming mega rail projects such as the ECRL and HSR. It also boasts solid financials with above industry ROE of 24%, 3 year projected earnings CAGR of 12% and net cash position of RM1.02/share (26% of market cap). GKent remains our top pick in the construction sector.

Valuation

• Apart from the earnings upgrade, we also raise our P/E target from 15x to 16x as we feel that GKent should be valued on par with larger cap contractors given its strong financials and exposure to mega rail jobs. Our valuation horizon is also rolled over from FY18 to mid-FY19. TP is raised from RM4.73 to RM5.60.

Source: Hong Leong Investment Bank Research - 23 Jun 2017