This article first appeared in The Edge Financial Daily on March 12, 2019
George Kent (Malaysia) Bhd
(March 11, RM1.19)
Maintain hold with an unchanged target price (TP) of 97 sen: Light rail transit line 3 (LRT3) main works like stations and the viaduct line have halted as the project is in redesign stage. We understand that the project will only be back to full swing in the second half of calendar year 2019. We opine that the share of results from LRT3 might record a loss for George Kent (Malaysia) Bhd (GKent) in the upcoming quarterly results due to be released this month, deduced from the fact that Malaysian Resources Corp Bhd (MRCB) recorded a loss of RM7.8 million in the share of joint-venture (JV) contribution in its fourth quarter of financial year 2018 (4QFY18) results and most of the JV contribution was from the MRCB-GKent JV. One possibility of the potential loss could be a reversal of construction profits due to a downward adjustment to contract value.
We have met up with the management of GKent recently. Among the key takeaways was that the construction cost of LRT3 had been revised downwards to RM16.63 billion (from RM22.5 billion) with a fixed price contract model. Its focus on potential jobs includes regional rail-related opportunities, and GKent is studying possibilities to participate in Singapore’s rail-related job bidding.
We opine that the company will face an uphill battle as bidding for Singapore mass rapid transit jobs is very competitive in Singapore. On the domestic front, near-term opportunities for GKent include water treatment plant jobs (RM100 million to RM200 million) and the second phase of the Klang Valley double track project (RM5 billion) where we understand that the company is looking for a JV partner to participate in the tender.
GKent’s automated meter reading solution (smart meters) is undergoing pilot testing in several states with commercialisation set for calendar year 2019. We opine that the sales of smart meters will benefit from the government’s effort to curb non-revenue water (NRW) given their ability to provide customers with real-time access to water consumption data for billing and monitoring consumption patterns and detect leakages in the water supply system.
GKent is targeting to grow the profit contribution from its metering division to 50% (from 20%) in the short term and to 75% in the longer term given the slowdown in the domestic rail construction industry. The company is looking for potential merger and acquisition opportunities and also may form strategic alliances to expand geographical markets and diversify its product range.
We have maintained our forecasts as the meeting yielded no major surprises. We have maintained our “hold” rating with an unchanged TP of 97 sen. Our sum-of-parts valuation of GKent is based on: i) the net present value (weighted average cost of capital: 12%) of its engineering division with nil order book replenishment; ii) eight times price-earnings ratio for metering assuming no year-on-year growth; and iii) a 20% discount to its net cash per share. Our valuation is based on a bear-case scenario for the company to reflect slowing mega rail job flows and the earnings sustainability issue post completion of LRT3 expected in FY24. — Hong Leong Investment Bank Research, March 11