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GKENT (3204) GEORGE KENT MALAYSIA BHD - Metering saves the day

GKent’s 9MFY21 earnings of RM23.1m (-34%) were above ours but below consensus expectations. Core PATAMI decline was driven by lower contribution from construction partially offset by its resilient metering division. Estimated construction orderbook (ex-LRT3) amounts to c.RM210m (cover ratio: 1.0x). Raise FY21-23 earnings by 10-17%. Maintain SELL with higher TP of RM0.60 after pegging FY22 EPS to 6.6x PE multiple (-1SD below 3-year mean).

Above ours but below consensus. GKent reported 3QFY21 results with revenue of RM78.9m (+12.5% QoQ, +8.2% YoY) and core earnings of RM10.6m (+21.8% QoQ, +3.8% YoY). This brings 9MFY21 core earnings to RM23.1m, decreasing by -33.6% YoY. The core earnings accounted for 82.5% of our full year forecast (consensus: 62.8%), which is above ours but below consensus expectations.

Deviation. The stronger than expected results were driven by better than expected performance from the metering segment.

Dividends. No DPS were declared for the quarter (9MFY21: 1.0 sen; 9MFY20: 1.5 sen).

QoQ. Core earnings expanded by 21.8% to RM10.6m in 3QFY21 aided by strong recovery in its metering segment which saw revenue and PBT increasing by 55.5% and 92.7% respectively. This was mainly due to its gradual restoration of capacity to clear its backlog of orders. Partially offsetting the recovery was its construction segment where revenue and PBT declined by -23.1% and -10.7% respectively.

YoY. GKent’s earnings were marginally higher by 3.8% spurred higher by its metering division (Revenue: +49.5%) while construction struggled (Revenue: -26.0%). During the quarter, a higher effective tax rate of 34.2% (vs.3QFY20: 19.3%) also hampered earnings delivery.

YTD. Core earnings shrunk by -33.6% as performance was largely hit by various forms of MCO evidenced by its -25.7% decline in revenue. While metering operations were quick to normalise post-lockdown, its construction segment was disrupted by SOP measures which are still ongoing.

Construction. We estimate GKent’s outstanding orderbook (ex-LRT3) amounts to c.RM210m which translates into cover ratio of 1.0x. On an YTD basis, revenue and PBT declined by -44.2% and -53.4% respectively owing to lockdowns and SOP measures. The segment also declined on a QoQ basis largely due to its thinning orderbook. LRT3 JV contribution saw no pick up with supplemental agreements still not finalised.

Manufacturing. Revenue and PBT increased by 6.2% and 45.3% respectively. Growth came largely on the back of resilient demand from overseas and local markets resulting in healthy utilisation rate of c.80% during the quarter. Domestically, its NRW meter orders (supplied to 600k homes across 6 states) will continue to sustain its metering performance.

Forecast. Increase FY21-23 earnings by 14.5/10.1/16.8% after factoring in stronger metering performance and recalibrating margin assumptions.

Maintain SELL, TP: RM0.60. While the results surprised on the upside, we remain concerned on its thinning orderbook and replenishment prospects. Maintain SELL with higher TP of RM0.60 after earnings adjustment. We think its target P/E multiple of 6.6x is warranted given its thin outstanding orderbook and cloudy job visibility.

Source: Hong Leong Investment Bank Research - 22 Dec 2020


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