Maintain BUY recommendation with target price (TP) of RM3.77
- GKent reported 3QFY17 results with revenue of RM122.1m (-26% QoQ, +26% YoY) and core earnings of RM23.7m (+27% QoQ, 3QFY16: RM0.4m). The significant YoY earnings increase for the quarter was due to a low base witnessed last year due to cost of variation orders (VOs) incurred (but this was subsequently recognised in 4QFY16).
- Cumulative 9M core earnings (ex. forex) totalled RM58.2m, surging almost 3-folds YoY. This strong growth was attributed to (i) 51% revenue increase, (ii) PBT margin expansion from 10% to 18.3% and (iii) lower base last year due to a weak 3Q as earlier elaborated.
- 9M earnings made up 94% of our full year forecast which is above our expectation. The surprise results were due to (i) stronger-than-expected engineering margins given continued VO works for the LRT extension and (ii) higher- than-projected JV contribution associated with LRT3 PDP.
- A 2nd interim dividend of 2 sen was declared. Coupled with the 1st interim dividend (paid in Nov), this brings cumulative FY17 dividends to 5 sen (FY16: 3.5 sen).
- Engineering continues to deliver. The engineering division saw 9M revenue grew +61% YoY while PBT margins expanded from 13.5% to 19%. The latter factor was likely due to the balance of works execution for the Ampang LRT extension along with the continued recognition of VOs.
- Orderbook remains sizable. With YTD job wins at RM771m, GKent’s orderbook stands at RM5.9bn. This translates to a superior cover ratio of 14.4x on FY16 construction revenue, the highest in our sector coverage.
- Metering sustains despite forex hit. While the metering division saw 9M revenue grow by +26% YoY, PBT increased by a smaller magnitude of +6% as margins contracted from 24.3% to 20.6.%. This was largely due to realised forex loss this year as opposed to gains in the previous year.
- Any possible delays in the LRT3 would be the key risk.
- In view of the strong results, we raise FY17 by 14% after incorporating higher engineering margins. FY18 earnings are increased by a smaller magnitude of 2% in view of potential margin normalisation next year (FY19 unchanged).
- GKent is a key rail play with exposure to the LRT extension, LRT3 and MRT2. It also boasts solid financials with 3-year earnings CAGR of 28%, above industry ROE of 20.9% and net cash position of RM0.58/share (21% of market cap).
- While FY18 earnings has been raised, our SOP based TP is unchanged at RM3.77 given the slightly lower net cash balance. Our TP implies FY17-18 ex. cash P/E of 16.8x and 15x respectively.