GKENT (3204) - George Kent (Malaysia) - Sell Down May Have Been Overdone

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GKent’s share price hit limit down for the past 2 days, declining a total of 51% from the day prior to GE14. Mega project reviews by the new PH government may impact the ECRL, HSR and MRT3 which GKent is eyeing on. Some comfort is drawn from the fact that GKent is the only fully integrated rail systems player in Malaysia with a pure local setup. We reckon it would be business as usual for metering which supplies to most of Malaysia (including Selangor and Penang). Cut FY19-20 earnings by 4-12% given uncertain macro job flow outlook. Maintain BUY but lower SOP based TP from RM5.66 to RM3.25. Net cash/ share of RM0.82 makes up 43% of share price.

2 consecutive days of limit down. Share price of GKent hit limit down (i.e. 30% decline in a day) for the last 2 consecutive days. All in all, since 8 May (i.e. the day before GE14), GKent’s share price has plunged by 50.8%. We attended a small group meeting hosted by GKent yesterday to gather some updates on the company.

Mega projects under review. Following the outcome of GE14, the new Pakatan Harapan (PH) government mentioned that it will review mega projects to ensure that the terms are fair. While it is still in the early days to ascertain what this means, we reckon that it will largely impact those mega projects that have yet to significantly commence work. We postulate that this would include the ECRL (RM55bn), HSR (RM60bn) and MRT3 (RM40bn).

Targeted jobs at risk. Amongst the mega rail jobs that GKent is eyeing on include (i) AssetsCo role (i.e. systems and rolling stock) via a European consortium for HSR and (ii) turnkey contractor for MRT3 via the MMC-Gamuda-GKent JV. The HSR PDPs were awarded in April while the MRT3 turnkey role has yet to be dished out. As both of the projects have yet to commence work, we believe they are at risk of delays (as reviews are conducted) or in the worst case, cancellation.

Still a rail system specialist. Management reassured that all of its ongoing projects (i.e. LRT ext, MRT2 track works and LRT3 PDP) were secured on merit via competitive tender. It also reminded that GKent is the only fully integrated rail systems player with a pure local setup. While this is reassuring to a certain extent, we reckon that the momentum of future job wins could be negatively impacted by the general slowdown in contracts as elaborated previously.

Largest metering market share. Management shared that GKent commands over 50% market share for water meters in Malaysia and supplies to all states except Melaka. Given such, we reckon that the regime change should not result to much impact for this division. Last year, GKent was awarded the single largest metering supply contract in Malaysia for Selangor. It has also has a long standing track record of supplying meters to Penang’s water authority. Regionally, GKent has also won competitive meter tenders in Hong Kong and Singapore.

Forecast. Given the uncertain macro contract flow outlook as explained above, we cut our FY19-20 orderbook replenishment target from RM500m p.a. to nil. This results to a 4% and 12% reduction in FY19-20 earnings.

Maintain BUY given drastic share price weakness. Apart from our earnings cut, we also lower our P/E target from 18x to 10x to reflect the potential sector de-rating from the uncertain macro contract flow outlook. Overall, our SOP based TP is reduced from RM5.66 to RM3.25. However, our BUY rating is maintained as we feel that the share price sell down over the past 2 days has been overdone. GKent’ net cash of RM465m (RM0.82/share) currently makes up 43% of its market capitalisation.



Source: Hong Leong Investment Bank Research - 16 May 2018