GKENT (3204) - George Kent (M) Bhd - Back On Track


We feel reaffirmed with GKENT’s prospect following a recent conversation with management. They remained focused in the execution of their on-going projects while looking for acquisition targets to complement its metering division. Furthermore, the LRT3 project is back on track with the government giving the green light for the construction of the new line. No changes to FY19-20E earnings. Maintain OUTPERFORM with an unchanged SoPdriven Target Price of RM2.20.

Green light on LRT3. Yesterday, Ministry of Finance (MOF) gave the green light for the construction works on LRT3 as they managed to lower the total cost from RM31.6b to RM16.6b after working relentlessly with GKENT-MRCB JV to come up with the cost reduction plan within a short span of time. We are positive on the news as it provides clarity to the market on the fate of LRT3 which could be shelved due to its high cost. However, management indicated that they are still working closely with the government on the PDP structure which has yet to be finalized.

Strong flows for metering. As for its metering division, it owns the largest brass forging plant in South-East Asia East Asia with a capacity of 3.0m annum, meters per annum which are exported to 42 countries worldwide and also locally where they managed to clinch a RM45.0m contract to supply water meters to Selangor over two years. Apart from traditional brass meters, we believe that its proprietary Automated Meter Reading (AMR) or SMART Metering solution would be the next big hit for the sector as it could assist the government is resolving nonrevenue water issues in the future given their ability to provide customers with real-time access to water consumption data. We believe that with demand outstripping supply, we do not rule out that its metering division could potentially grow faster than our assumed 10% growth in FY19.

Outlook. Currently, its outstanding order-book inclusive of LRT3 stands at RM5.3b (based on previous budget of RM9.0b). While GKENTMRCB JV is still in discussion with the government on the PDP structure, we believe that their outstanding order-book would be revised upwards as the current cost for LRT3 now stands at RM16.6b as compared to our assumptions of RM9.0b. To recap, we highlighted in our previous report dated 13-June-2018 that we are expecting the total cost for LRT3 to hover closer to RM14.0-15.0b, and unlikely to be scrapped. We laud the government for their relentless hard work and ability to conclude the revised plan for LRT3 within a short span of time for the benefit of the rakyat as the new line is expected to serve a twomillion population upon completion. As for its metering division, management is actively looking for opportunities or acquisition targets to expand their footprint South-East Asia.

Earnings estimates unchanged. Post results, we made no changes to our FY19-20E earnings for the time being pending more information on the potential change in PDP structure.

Maintain OUTPERFORM. We reiterate our OUTPERFORM call but with an unchanged SoP-driven Target Price of RM2.20. We see deep value emerging in the stock, arising from the recent sell-down due to the negative news flow in the construction as several mega infrastructure projects were scraped since the change in government, and we believe that the stock should re-rate given that they have received the green light from government to proceed with LRT3. Our current TP of RM2.20 is based on; (i) 10x FY19E PER for metering, (ii) 9x FY19 PER for construction, (iii) NPV of 6% PDP fees based on RM9b cost, and (iv) 30% discount to 1Q19 net cash, implying FY19E PER of 8.8x. Key downside risks to our call are: (i) lower-thanexpected margins, and (ii) delay in construction works.

Source: Kenanga Research - 13 Jul 2018