1H20 CNP of RM24.6m makes up 41%/40% of our and consensus full-year estimates. We deem the results to be within expectation as GKENT’s results are generally weaker in first half. No dividends declared as expected. No changes to FY20-21E earnings. Upgrade to OP (from MP) with unchanged SoP-driven TP of RM1.15.

Results broadly in-line. 1H20 CNP of RM24.6m makes up 41%/40% of our and consensus full-year estimates. We deem the results to be within expectation as GKENT’s results are generally weaker in first half, coupled with the fact that LRT3’s work progress has yet to pick up pace. No dividends declared as expected.

Results highlight. 1H20 CNP fell 41% YoY, attributable to: (i) decrease in revenue (-15%), (ii) significantly lower contribution from associate and joint-venture contributions, (iii) higher effective tax rate of 27% (+10ppt). The decline in revenue was due to the decline in billings for its construction division while lower contribution from associate’s contribution was due to the project cost review on LRT3, which resulted in a temporary halt in work progress. QoQ, its 2Q20 CNP decreased by 18% mainly due to higher effective tax rate of 30% (+5ppt).

Outlook. For LRT3, we believe the current progress is still at c.10%, but management remains optimistic in meeting the construction timeline as it has been rescheduled to 2024. As for its metering division, management is doubling their effort in promoting their smart metering solutions to various state governments and countries within the South-East Asia region. Its smart meters are an add-ons to existing meters offer fixed network reading or mobile network reading, allowing water players to bill customers effortlessly and we have built the potential into our estimates.

Earnings estimates unchanged. Post results, no changes to FY20-21E earnings.

Upgrade to OUTPERFORM from MARKET PERFORM due to the recent retracement in share price with an unchanged Target Price of RM1.15. We believe its outlook is improving but still highly dependent on the execution of LRT3. Our TP implies FY20E PER of 7.8x, which is in-line with our ascribed multiple of 6.0-11.0x for the construction space.

Risks for our call are: (i) lower-than-expected margins, and (ii) delay in construction works.

Source: Kenanga Research - 25 Sept 2019