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Wednesday, September 28, 2016

George Kent - A strong showing

George Kent - A strong showing

Author: kltrader   |   Publish date: Wed, 28 Sep 2016, 11:46 AM 

Results

  • GKent reported 2QFY17 results with revenue of RM164.8m (+44% YoY, +34% QoQ) and core earnings (ex. forex) of RM18.7m (+223% YoY, +19% QoQ). Cumulative 1HFY17 core earnings of RM34.5m soared 140% YoY.

Deviation

  • 1H earnings were above expectations at 67% of our full year forecast. This was due to the upside surprise for engineering margins and JV profits (from the LRT3 PDP).

Dividends

  • An interim dividend of 3 sen was declared.

Highlights

  • Best of both worlds for engineering. The engineering division experienced the best of both worlds with 1H revenue growing +85% and PBT margins expanding from 15.2% to 16.7%. We reckon that this was largely due to the balance of works for the LRT Ampang extension (i.e. ongoing system upgrades and depot remodelling) as well as recognit ion of certain variation orders (VOs). Looking forward into 2H, we see the possibility of a downward normalisation in margins should less VOs be recognised. This is somewhat evident QoQ with PBT margins normalising from 20.8% to 13.7%.
  • Sitting on a superior orderbook. GKent has managed to secure RM494m worth of contracts YTD, consisting of the MRT2 track works. On potential job wins in the near term, GKent has a Letter of Intent (LOI) for a hospital job in Putrajaya worth RM300-350m which could materialise to an award by year end. GKent’s orderbook is currently at a record high of RM5.4bn, implying a superior cover of 13.2x on FY16 construction revenue (highest ratio within our coverage).
  • Steady metering contribution. PBT for metering remained steady in 1H (+3% YoY) as higher revenue (+19% YoY) was offset by margin contraction from 22.5% to 19.6% due to the stronger ringgit against the US dollar. Potential catalysts for this division include securing the metering supply tenders for the states of Malacca and Selangor.

Risks

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

Forecasts

  • While 1H results appear to be above expectation, we have chosen to take the conservative stance and retain our forecasts. This is in view of the potential downward normalisation in engineering margins for 2H as the LRT extension balance of works approaches completion. Rating Maintain BUY, TP: RM3.25 (ex. bonus)
  • 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 26%, above industry ROE of 15.4% and net cash position of RM0.64/share (25% of market cap).

Valuation

  • Our SOP based TP is raised slightly from RM3.21 (ex. bonus) to RM3.25 as we update for its latest net cash balance.
Source: Hong Leong Investment Bank Research - 28 Sep 2016

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