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Gkent’s 4QFY20 earnings of RM6.8m (-63% YoY) were below our and consensus expectations. FY20 core PATAMI decreased 48% YoY as a result of lower contribution from engineering and metering segments compounded by lower contribution from LRT3 JV. We estimate the company’s construction orderbook (ex-LRT3) amounts to c.RM300m (cover ratio of 1.4x). Cut FY21-22 earnings by 33-40%. Downgrade to SELL with lower SOP-driven TP of RM0.50 (previously RM0.58) following the earnings cut. Our TP implies FY21 & FY22 P/E of 7.8x and 8.8x respectively.

Below expectations. Gkent reported 4QFY20 results with revenue of RM82.4m (+13.0% QoQ, -28.0% YoY) and core earnings of RM6.8m (-34.0% QoQ, -62.9% YoY). This brings FY20 core earnings to RM41.6m (no EIs for the period), decreasing by -48.2% YoY. The core earnings accounted for 78% of our full year forecast (consensus: 85%), which is a big miss.

Deviations. The results shortfall was primarily due to lower-than-expected revenue contribution and lower realised margins from engineering segments as a result of thinning orderbook.

Dividends. No dividends were declared for the quarter (FY20: 2.5 sen, FY19: 7.0 sen).

QoQ. Core PATAMI decreased by -34.0% largely due to weakness in the metering segment resulting from lower sales.

YoY. Core PATAMI declined by -62.9% dragged by lower progress billings from engineering (ex. LRT3 JV) segment which saw revenue and PBT declining by 34.6% and 72.8% respectively.

YTD. Core PATAMI decreased by -48.2% as a result of lower contribution from engineering and metering segments compounded by lower contribution from LRT3 JV which recorded a marginal profit (FY19: RM12.2m). The lower contribution from LRT3 JV was mainly due to delays in work progress for the projects arising from finalisation of designs and specifications with respective sub-contractors. Given that the LRT3 JV has successfully novated its agreement with one of the subcontractors, TRC, we expect smoother subsequent rollout of novated agreements, clearing a path for acceleration of construction works moving ahead.

Outlook. We estimate the company’s construction orderbook (ex-LRT3) amounts to c.RM300m which translates into cover ratio of c.1.4x of FY20 construction revenue. In terms of MCO developments, we understand LRT3 project has been approved by the government to resume works last week. Meanwhile, its manufacturing segment has also restarted on the 19th of April 2020. For the time being, management aims to focus on the execution of its construction projects (Tanjung Karang Hospital & Putrajaya Hospital ending CY20) and is also in the midst of finishing its variation order works for LRT2 (guided to be minimal). Construction tender prospects remain largely similar with focus on regional rail opportunities such as Bangkok Orange Line. The railway line was recently approved by Thailand’s cabinet with tenders to be held on Oct-20 after repeated delays. Nonetheless, we are not too sanguine on its chances due to stiff competition. On the metering side, slower disbursements of development expenditure arising from MCO and political changes could further hurt its sales.

Forecast. Cut FY21 & FY22 earnings by 33.3% & 40.6% after factoring lower progress billings, water meter sales as well as MCO downtime.

Downgrade to SELL, TP: RM0.50. Downgrade to SELL with lower SOP-driven TP of RM0.50 (previously RM0.58) following the earnings cut. We opine that with slow construction orderbook replenishment prospects coupled with deteriorating outlook for its metering segment, cash reserves could deteriorate in tandem with poorer earnings. Our TP implies P/E of 7.8x for FY21 and 8.8x for FY22.

Source: Hong Leong Investment Bank Research - 11 May 2020

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