KUALA LUMPUR (June 24): Analysts turned bearish on George Kent (Malaysia) Bhd’s prospects after the construction group posted a 72% lower net profit for its first financial quarter ended April 30, 2020 (1QFY21), citing concern about its current order book composition.
For 1QFY21, George Kent saw its net profit drop to RM3.73 million from RM13.51 million. Quarterly revenue was down by 53% at RM39.31 million from RM82.78 million the year prior.
The drop in both the top line and bottom line was due to a halt in its business activities following the implementation of the movement control order (MCO).
Hong Leong Investment Bank Research (HLIB Research) analyst Jeremy Goh said in a note to clients today that George Kent’s outstanding order book (excluding its Light Rail Transit 3 [LRT3] contract) amounts to around RM280 million or a cover ratio of 1.3 times (based on its FY20 construction revenue).
While construction work for its hospital projects has resumed since the second week of June, the pace has been gradual and the group’s management has indicated that it will not normalise to pre-MCO levels due to the implementation of measures such as social distancing.
“As such, we think that the completion timeline for its hospital projects is likely to be extended to end-CY21 (calendar year 2021) in view of the pandemic,” said Goh.
He also pointed out that given the dearth of railway construction contracts in the pipeline, HLIB Research anticipated limited near-term order book replenishment potential for George Kent.
While potential pump-priming initiatives by the government are expected, job award conversion is unlikely in the short term, noted Goh.
However, the metering segment is considered to have better prospects, as its utilisation rate gradually normalised to 60% in early June, compared with 70% to 75% pre-MCO.
George Kent has indicated that orders have been robust for its metering segment, and it is focusing on addressing its backlog of orders.
Meanwhile, Kenanga Research analyst Lum Joe Shen pointed out that George Kent’s current construction order book stands at RM4.6 billion. Of this sum, 95% is derived from the LRT3 project worth RM4.35 billion, which will provide visibility for the next four years.
“Note that we have factored in zero replenishment for George Kent in FY21-22 as it has yet to secure any new construction projects since December 2016,” said Lum.
He pointed out that despite George Kent’s 1QFY21 results only making up 12% and 10% of Kenanga Research's and the consensus full-year estimates, the results were within expectations as the quarter absorbed the brunt of the MCO.
Thus, he expected its financial performance to slowly improve in the coming quarters.
Meanwhile, for Goh, George Kent's 1QFY21 core earnings of RM3.7 million only accounted for 11.3% of HLIB Research's full-year forecast and 8.7% of the consensus forecast, which was below expectations.
He also cut his FY21 earnings forecast by 16.5% after recalibrating the impact of the MCO on construction progress billings, water meter sales as well as profitability margins.
Both Goh and Lum maintained their calls and target prices (TPs) for George Kent. Kenanga Research maintained its “underperform” call with a TP of 51 sen, while HLIB Research stuck to its “sell” call and TP of 52 sen.
As of 11.16am, George Kent shares were up half a sen at 66.5 sen, valuing the group at RM374.57 million. It saw 300,300 shares done.