Highlights
- Transition to engineering. While GKent’s origins began with water metering, engineering has now become the largest contributor at 80% of revenue (FY16). Despite flattish metering contribution, overall revenue managed to grow at a 28% CAGR thanks to explosive engineering contribution.
- Strong execution on LRT ext. GKent’s big break happened in 2012 when it secured the RM1.1bn Ampang LRT systems contract. Although it faced challenges given delays by the civil contractors, GKent managed to deliver its systems works on time, within budget and was profitable on the job.
- LRT3 – The next frontier. In Sept 2015, the 50:50 JV between MRCB and GKent beat 5 other contenders for the LRT3 (RM9bn) PDP role. We believe the JV is well equipped to undertake the job given (i) both their experience with the Ampang LRT extension and (ii) MRCB’s track record with KL Sentral. Awards of the more sizable packages to the work contractors are expected to begin in 3Q16.
- Supported by sizable orderbook. GKent sits on a sizable orderbook of RM5.1bn, 88% of which comprises the LRT3. This implies a superior cover ratio of 12.5x on FY16 engineering revenue, the highest within our coverage. Potential job wins include (i) MRT2 track works (RM1bn) where it is bidding via a JV with CCCC, (ii) hospital job in the Klang Valley (RM300-350m) and (iii) several sewerage treatment plants (RM700m).
- World class metering. GKent’s water meters commands over a 50% market share in Malaysia. Its ability to secure sizable orders from authorities in Hong Kong and Singapore is testament to the international recognition of its meters. Domestically, there is potential for GKent to tap into the states of Selangor (previously inaccessible) and Melaka.
Risks
- Any possible delays in the LRT3 would be the key risk.
Forecasts
- We forecast FY17 core earnings to scale a new high of RM52m (+29% YoY). For FY18, growth moderation is expected at +6% to RM55m as the LRT3 would have just commenced. Earnings growth will regain traction in FY19 (+17% YoY) to RM64m once the LRT3 moves into full swing.
Rating
Initiate with BUY, RM3.23 TP (+58% upside)- Having undertaken the LRT extension systems and appointed as PDP for the LRT3, we view GKent as a formidable engineering force that can no longer be ignored.
- It also boasts solid financials with strong 3-year earnings CAGR of 17%, above industry ROE of 15.4% and net cash position of RM0.74/share (36% of market cap).
Valuation
- Our TP of RM3.23 is based on a simple 2-stage SOP methodology comprising (i) 14x P/E multiple applied to mid- FY18 core earnings and (ii) its net cash position.
GKENT (3204) - George Kent - Morphing to bigger things
http://klse.i3investor.com/blogs/hleresearch/101233.jsp
