Wall Street's optimism vanished late Wednesday as President Trump’s sweeping new tariffs triggered a sharp selloff in U.S. equity futures and a flight to safe-haven assets, casting a shadow over global trade outlook and corporate margins. Key Market Moves Instrument Move S&P 500 Futures -3.5% Nasdaq 100 Futures -4.5% Treasury Futures Surged (Yields fell sharply) Japanese Yen Gained as safe haven AUD & NZD Bonds Rallied Tariff Summary A 10% baseline tariff on all U.S. imports. Additional tariffs on ~60 countries, with higher duties targeting China, EU, and Vietnam . Steel and aluminum imports spared from the new round but remain under existing 25% duties. “Eye-watering tariffs scream ‘negotiation tactic,’ which will keep markets on edge for the foreseeable future.” — Adam Hetts, Janus Henderson Investors Sector Impact Major declines hit consumer, tech, and industrial names: Company Sector Move Nike, Gap, Lululemon Retail (Vietnam-based) -...
Maintain BUY recommendation with target price (TP) of RM3.77
Results
- 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.
Deviation
- 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.
Dividends
- 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).
Highlights
- 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.
Risks
- Any possible delays in the LRT3 would be the key risk.
Forecasts
- 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).
Rating
Maintain BUY, TP: RM3.77
- 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).
Valuation
- 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.
Source: Hong Leong Investment Bank Research - 06 December 2016
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