KUALA LUMPUR, Dec 5 (Bernama) -- Bursa Malaysia closed lower on Friday amid mixed regional market performance as investors turned cautious over a possible rate hike by the Bank of Japan (BOJ) and upcoming US economic data that may influence the Federal Reserve’s (Fed) interest rate decision next week. At 5 pm, the FTSE Bursa Malaysia KLCI (FBM KLCI) pared most earlier losses to settle 4.55 points easier, or 0.28 per cent, to 1,616.52 from Thursday’s close of 1,621.07. The benchmark index, which opened 0.37 of-a-point lower at 1,620.70, moved between 1,609.67 and 1,621.25 throughout the day. The broader market was negative, with decliners outpacing advancers 604 to 439. A total of 550 counters were unchanged, 1,151 untraded, and 18 suspended. Turnover declined to 3.17 billion units worth RM2.24 billion from 4.48 billion units worth RM2.75 billion yesterday. Rakuten Trade Sdn Bhd vice-presiden...
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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