Maintain NEUTRAL with new MYR1 TP from MYR0.90, 8% downside with 3.6% FY20F yield. Our TP is based on unchanged FY20F target P/E of 9x. We raise our FY20-21 forecasts by 6%, incorporating higher new contract replenishment assumptions from minimal previously. This hinges on an improved outlook for the construction sector – George Kent could bid for water treatment plant construction jobs, which is an area it is familiar with. On the flipside, 1HFY20F earnings could be weak due to LRT3.
George Kent's FY19 (Jan) core profit declined 34% YoY to MYR82m, in line with our and consensus estimates, representing 96-100% of FY19F forecasts. For 4QFY19, earnings fell 4% QoQ and 62% YoY, due to its share of JV losses amounting to MYR6m as progress on the Light Rail Transit 3 (LRT3) project stalled to facilitate redesign works, as well as a conversion of the project development partner (PDP) contract into a turnkey project. For FY19, the effective tax rate was noticeably higher at 33% vs 22% in FY18, due to higher expenses that were not tax deductible – this partly explains the lower full-year earnings.
LRT3 to resume at normal pace in 2H19. GKent-MRCB signed a turnkey (fixed-price) contract with the owner of the LRT3 project, Prasarana Malaysia (Prasarana) on 25 Jan 2019. This was followed by the novation of contracts from Prasarana to GKent-MRCB in regards to the work package contractors (WPC, sub-contractors) on 22 Feb 2019, thereby enabling GKent-MRCB to enter formal negotiations with the WPC's on the redesign and cost-cutting measures. Negotiations are currently underway and are estimated to complete by mid-2019, allowing works to resume in 2H19. Its outstanding construction orderbook stood at >MYR5bn, with a large portion comprising the LRT3 turnkey project.
Key assumptions and risks. We expect George Kent to secure MYR300m worth of new contracts in FY20F-22F (from minimal expectations previously) premised on improved job visibility, particularly for the construction of water treatment plants. Risks to our call include cost overruns on the LRT3 project, a prolonged slowdown in construction activities, and a low win-rate in the open tender system.
Source: RHB Securities Research - 26 Mar 2019
https://klse.i3investor.com/blogs/rhbresearch/199514.jsp
